IEA: Slashed spending by drillers could lead to price spike

Oil prices recorded hefty gains in North America trade on Monday, with West Texas Intermediate futures climbing above the $33-level after the International Energy Agency said it expected USA shale production to fall this year and next. The annual report was presented on the opening day of IHS CERAWeek in Houston. Normally when prices are so low, companies-and countries-start to increase their production to compensate. Brazil and Canada follow, with each forecast to produce an additional 800,000 b/d. It forecast that 4.1 million barrels a day will be added to the global oil supply between 2015 and 2021, down sharply from growth of 11 million barrels a day between 2009 and 2015. While production is projected to go down by 600,000 barrels per day (bpd) this year and a further 200,000 bpd next year, it is expected to increase again in 2018. The agency is referring to the capability of USA shale producers to turn on the crude oil taps as quickly as they were able to shut them down.

But OPEC has been relegated to mere mortal status by the American shale oil revolution, which has created a flood of production.

Mr El-Badri said he had lived through six oil cycles over his career but the surge of shale oil supply from the United States has made this one of the most vicious.

The agreement is not clear on many key issues, such as the stance toward Iran, and its impact on the market will be “neutral”, said Takayuki Nogami, director of the Energy Research Division at Japan Oil, Gas and Metals National Corp.

According to GasBuddy historical data, gasoline prices on February 22 in Arkansas have ranged widely over the last five years: $2.13 in 2015, $3.20 in 2014, $3.64 in 2013, $3.44 in 2012 and $3.04 in 2011.

“Just a few years ago such a free-for-all would have been unimaginable, but today it is the reality and we must get used to it, unless the producers build on the recent announcement and change their output maximization strategy”. While prices should rally once the market begins rebalancing, the availability of resources that can be easily accessed will “limit the scope of rallies”, at least in the near term.

Some “certainties” that had guided previous MTOMR outlooks “are now not so certain at all”.

However, the IEA said this growth would be “neither equally shared among the different oil products nor the world’s regions”.

“For some time now analysts have tried to understand when the oil market will return to balance”, the MTOMR noted. The agency acknowledged that the industry’s expectations – and its own predictions – that oil markets would recover in 2015 proved “very wide of the mark”.

“Iran’s early post-sanctions marketing appears to be effective with the National Iranian Oil Company indicating that exports have risen by 500,000 barrels per day since sanctions were lifted in mid-January, although we expect that some of this volume was sold out of storage”, investment bank Jefferies said.

Analysts also said today’s price rebound was helped by the reopening of some regional markets after the Chinese New Year break.