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The International Energy Agency (IEA) expects oil prices to remain low through 2016, but forecasts a rebound to begin in 2017 as the current oil glut recedes and demand rises.
“Looking to 2016, I see very few reasons why we can see growth in prices,” Fatih Birol, the executive director of the IEA, told a news conference Wednesday in Paris on the sidelines of the United Nations climate conference. “I think 2016 will be a year where we will have a lower price environment.”
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Iran’s return to the global oil market will only contribute to the oversupply of oil, especially since OPEC, of which Iran is a member, agreed at its third consecutive ministerial meeting on Dec. 4 not to adjust its daily output to bolster prices. The ceiling remains at 30 million barrels per day, but the group has been exceeding this limit by an estimated 1.3 million barrels per day.
“There is a lot of oil in the market now, and 2016 demand in the market will be weaker,” said the chief of the Paris-based IEA, which advises its 29 member states on energy policy. “And at the same time we may well see Iran to come to the market if sanctions are lifted, which is going to increase the amount of oil in the markets.”
This week oil prices have been struggling to maintain a level of $40 per barrel. The price of the world benchmark, Brent crude, fell below $40 on Tuesday for the first time since the depths of the global economic crisis in early 2009, while a barrel of the U.S. benchmark, West Texas Intermediate, was under $37.
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The low price of oil has led the energy industry to slash investments in drilling and exploration, which could lead to a tighter supply. Birol noted that oil companies have cut such spending by about 20 percent so far this year, and may spend even less in 2016. “So 2016 may well be another year with lower prices and this will have implications of course for investments in the oil sector,” he said.
But this spending decline, combined with continued growth in demand, according to Birol, eventually could lead to “some surprises” in pricing. “We have never seen, in the last 30 years, two years in a row of oil investments declining, and this will have an impact on production in the next few years.”
In the meantime, though, Birol said he fears that a protracted period of low prices for oil, as well as for gas and coal, could inhibit the move to clean, renewable energy in some countries, especially those in the developing world, who may prefer to generate electricity by burning cheap, toxic coal rather than turn to more expensive energy alternatives.
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“We have been telling governments that it would be an historical mistake to lessen the support on renewables and efficiency as the price of fossil fuels become cheap,” Birol said. “Let me be clear: Lower oil prices are a risk for the transformation of energy.”
While Birol didn’t say how low he expects prices to go in 2017, he’s on the record saying he expects oil to rebound, albeit probably slowly, to about $80 per barrel in the next several years, specifically because reduced investment by oil companies should constrict supply significantly.
Crude oil priced at no higher than $50 per barrel is “not sustainable,” Birol said in an interview published Dec. 1 by The Wall Street Journal. He said he expects the reduced investment by oil companies to cut non-OPEC production by more than 600,000 barrels per day in 2016. But after that, he said, “we would expect to see upward pressure on prices.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com