• Prices will rebound in 2H to $40-$50 a barrel, with volatility
  • 'Good sweating' of industry will see U.S. drop 1m bbl/ day

Russia and Saudi Arabia’s agreement to cap oil output will help bring the market back into balance and trigger a rebound in prices in the second half of this year, said Daniel Yergin, vice chairman of energy consulting group IHS Inc.

The world’s two biggest producers along with Venezuela and Qatar struck a tentative deal last month to cap production at January levels to stem a glut in supply that has seen prices tumble almost 70 percent in two years to below $35 a barrel. With a freeze, prices could recover in the second half to $40 to $50 a barrel, “but with a lot of volatility there,” Yergin told the Global Financial Markets Forum in Abu Dhabi Thursday.

“This freeze is really a bridge to the autumn, and the autumn is when you start to see the market more back in balance,” the Pulitzer Prize-winning author said. “This freeze is the beginning of the process.”

The agreement, the first major cooperation between OPEC and non-OPEC producers in 15 years, is contingent on producer nations, notably Iran and Iraq, signing on. Iraq said it will agree if other nations commit, while Iran, which was unshackled from sanctions only in January, dismissed the plan as “ridiculous.”

Iran’s projected increase -- it plans to add 1 million barrels a day this year -- is a stumbling block to any agreement, Yergin said. He estimates the country will add 400,000 to 600,000 barrels a day, without giving a time frame. “There is lots of talk about investment in Iran. We think companies are going to be very cautious because of Iranian politics, and Iranian decision making.”

In the U.S. by contrast, where the shale-oil boom has driven stockpiles to their highest in more than eight decades, Yergin sees production dropping by more than a million barrels a day from last April to next summer. "We will see bankruptcies, we will see mergers, we will see impairments,” he said.

There is room for more efficiency in the oil business, he said. “We are seeing a good sweating in the global industry,” Yergin said. “It is a day of reckoning for the governments as well as companies. Countries know that they need a way out.”

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