Oil rises after IEA reports steep drop in investment

Prices have collapsed by more than half since mid-2014 and now languish under US$50, hurt by a stubborn global supply glut and Opec’s decision to maintain output to counter booming USA shale production.

“It would be a grave mistake to index our attention to energy security to changes in the oil price”, said IEA Executive Director Fatih Birol.

Global demand for crude will bring more balance to the oil market as soon as next year even with Iran preparing to increase output, according to Opec secretary-general Abdalla El Badri and Pulitzer Prize-winning author and energy consultant Daniel Yergin.

“Reliance on Middle East oil exports eventually escalates to a level last seen in the 1970s”, the report says.

Several companies have been backing away from the oil sands, finding they can’t make the economics of new projects work, as most of their projects were greenlighted when prices were higher, or believed to be heading higher.

The IEA said that spending on exploration and production has fallen 20% this year, and it warned against further cuts.

It was only 18 months ago when OPEC embarked on a campaign to keep oil prices low and force higher-cost US shale oil producers out of the industry as a means of regaining market share. The report includes the IEAs most up-to-date oil demand, production and pricing estimates in what has been an extremely volatile and unpredictable global commodities market.

“We are approaching the end of the single largest demand growth story in energy history”, Birol told the FT.

On Monday, Nymex oil prices slumped to $43.64, the lowest since October 28, after industry research group Genscape estimated a build of approximately 1.8 million barrels at the Cushing, Oklahoma delivery point for US crude in the week ended Friday. “But our central scenario is that lower production there will gradually boost prices to $85 a barrel by 2020”.

The IEA forecast that collectively, the US, European Union and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

The decline in investment, however, has not been enough to reverse oil’s price weakness.

Oil prices are down more than 50 percent since the middle of a year ago.

But the bond programme will please the worldwide Monetary Fund, which has said Saudi Arabia should diversify its economy away from its dependence on oil.

World energy demand is forecast to grow by almost one-third between 2013 and 2040, with much of that growth taking place in developing economies.