IEA Sees Oil Rising to $80 by 2020 as Output Growth Slows

  • Fatih Birol sees seeds of next price rally in spending cuts
  • Oil prices of $100 a barrel "unlikely for foreseeable future"

Oil's Slide: Do Prices Have More Room to Fall?

Oil prices will reach $80 a barrel by 2020 as global oil supply growth is “seriously” plunging, the head of the International Energy Agency said, suggesting the light at the end of the tunnel for the energy industry is still far away.

Oil prices will begin to rise at the end of next year as demand overtakes supply and stockpiles start to shrink, Fatih Birol said during the IHS CERAWeek conference in Houston. While inventories will start declining in 2018, the price rebound would be limited by production from U.S. shale plays, he said.

“It’s easy for consumers to be lulled into complacency by ample stocks and low prices today," Birol said. "But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future,” he added.

The Paris-based IEA assumes 2016 average oil prices around current levels of $35 a barrel, rising slowly in 2017 as the market starts to tighten. The IEA outlook signals that the global energy industry, which every year gathers in Houston for CERAWeek, will see a recovery from current low prices, but only after it endures more months of pain.

Shale Cap

Birol said that a "big chunk" of the U.S. shale oil industry will return to growth once prices recover to $60 a barrel, acting as a "cap" to any rally. The view about a "shale cap" echoes a widely held opinion within the oil trading community.

Ian Taylor, chief executive officer of Vitol Group BV, the world’s largest oil trader, earlier this month said he expected up to 10 years of low oil prices as the U.S. shale industry limits any rally. "It’s hard to see a dramatic price increase," Taylor told Bloomberg in an interview Feb. 8, saying prices were likely to bounce around a midpoint of $50 a barrel for 5 to 10 years.

Neil Atkinson, head of the oil markets division at the IEA, said at the same event that the industry should stop thinking about the return to triple-digit prices. "$100 a barrel is unlikely to return for the foreseeable future," he said.

Even a small uptick in prices will spur some U.S. shale explorers to activate rigs and begin drilling anew in fields that are rich enough in crude to generate hefty profits at $40 a barrel, said Vance Scott, U.S. oil and gas transaction leader at Ernst & Young LLP.

“People are underestimating the enormity of shale,” Scott, a former Chevron Corp. petroleum engineer, said during an interview on the sidelines of the CERAWeek gathering on Monday. The global crude market would require a cataclysmic supply disruption from a war or similarly “bad event” before prices would jump, he said.

Costly Megaprojects

Still, by the end of this decade or the beginning of the next one, the oil market will need the costly megaprojects that giant oil companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc specialize in, including ultra-deep water, the IEA said.

Oil prices have plunged more than 70 percent since mid-2014 as Saudi-led OPEC has pumped above its quota in a bid to regain market share from North America and other producing regions. Oil climbed on Monday amid speculation that a production freeze by some OPEC members and Russia could eventually help to abate the surplus.

Brent crude, the international benchmark, rose 5.1 percent to settle at $34.69 a barrel on the London-based ICE Futures Europe exchange Monday.

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