‘Historic’ spending cuts putting future oil supply at risk, threatening spike in prices

An oil shock may be lurking nearby as the price bust has hammered investment in future supply, according to the International Energy Agency.

“Historic” investment cuts happening now increase the chance of oil-security surprises in the “not-too-distant” future, Neil Atkinson, head from the IEA’s Oil Industry and Markets Division, said in Singapore on Wednesday. About US$300 billion is required to sustain the present level of production, and nations including the U.S., Canada, Brazil, and Mexico are facing difficulty to keep up investments, he explained.

“We need lots of investments just to stand still,” Atkinson said at the launch event of SIEW 2016. “There’s danger once we are reaching a place where we’re barely investing upstream. If investment doesn’t resume in 2017 and 2018, we are able to visit a spike in oil prices as oil supply can’t meet demand.”

Companies from ConocoPhillips to Chevron Corp. and BP Plc have cancelled more than US$100 billion in investments, laid off tens of thousands of workers, slashed dividends and sold assets as oil sank below US$30 a barrel to some 12-year low. With crude rebounding since mid-February to close US$41, Atkinson said the worst may be over for prices because they have a floor “for the time being.” The Organization of Petroleum Exporting Countries and other producers including Russia plan to meet in Doha next month to go over limiting output to reduce a global oversupply.

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No Impact

“The meeting may or may not take place,” said Atkinson. It’s seen as a gesture to exhibit that there’s stability and also the impact it’ll have on actual supply structure will be “none whatsoever,” said Atkinson, who expects oil prices to average US$35 to US$40 a barrel this year.

West Texas Intermediate oil for May delivery lost around 58 cents US to US$40.87 a barrel on the Ny Mercantile Exchange and what food was in US$41.01 at 6:36 p.m. Singapore time. Prices, that have declined for 2 years, may have passed their lowest point as shrinking supplies outside OPEC and disruptions inside the group erode the worldwide surplus, the IEA said in its monthly market set of March 11.

“You have to invest large sums of cash just to maintain existing production and when you need to grow production to satisfy the demand growth that we’re expecting, those funds needs to come from somewhere and we’re seeing big cuts,” Atkinson said in a separate interview at the event. The IEA was founded following the oil crisis of 1973-1974, initially to help countries co-ordinate a collective reaction to major disruptions in the supply of crude, according to its website.

Market Balance

U.S. crude stockpiles are at 523.2 million barrels, the highest level since 1930, according to data from the Energy Information Administration. Demand and supply will move closer to balance within the second half of this year, according to Atkinson.

The oil market will be balanced in 2017 and stockpiles will fall from 2018 to 2021, Atkinson said. Global demand will grow 1.2 percent a year within the five years to 2021, compared with 1.7 per cent annual growth in 2009 to 2015, he explained.

There will be “barely any supply to satisfy demand” if investments don’t resume within the next a couple of years, said Atkinson. Aside from Saudi Arabia and one or two other Gulf state nations, there is little spare capacity all over the world, he said.

The risk of supply outages such as those who work in Nigeria and Iraq are “episodic” events because of political instability, something that could also affect other countries around the world because of low oil prices, based on Atkinson. Further ahead, Venezuela’s economic problems can lead to social and political unrest and also the possibility of supply disruptions in Libya remains a danger, he said.

Bloomberg News