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Worst is over for oil as investment at risk, IHS's Yergin says

Wednesday, August 31, 2016 - 20:11

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The worst has passed for oil prices, which are now too low to ensure investment in the new supplies needed during the rest of the decade, IHS Markit Ltd's Vice Chairman Daniel Yergin said.

[LONDON] The worst has passed for oil prices, which are now too low to ensure investment in the new supplies needed during the rest of the decade, IHS Markit Ltd's Vice Chairman Daniel Yergin said.

Crude futures, trading near US$48 a barrel on Wednesday, will rise next year to the "mid-US$50 range," Mr Yergin said in an interview. The market is rebalancing as the global oversupply diminishes, with US crude production set to fall another "couple of hundred thousand" barrels a day by the end of this year, he said. The recovery will be unaffected by any Opec decision to freeze output, he added.

"Downturns end, it's not a permanent thing," Mr Yergin said in Stavanger, Norway, where he's attending the ONS Conference. "We are in a recovery phase, and a rebalancing phase. The price level that we are at is not one that is going to provide the investments needed to meet demand needs over the next half-decade." 

While oil has climbed from the 12-year lows reached at the start of 2016, a persisting supply glut is pinning prices at half the levels of two years ago. Still, with global demand rising and oil explorers slashing hundreds of billions of dollars in investment, finding enough supply could become an issue again in coming years.

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Mr Yergin, a veteran observer of the oil market, won the Pulitzer prize in 1992 for his history of the industry, "The Prize: The Epic Quest for Oil, Money and Power." It's "too soon to say" whether the Organization of Petroleum Exporting Countries will agree to cap output when members gather for informal talks in Algiers next month, Mr Yergin said. An initiative with non-members such as Russia collapsed in April because of political tensions between Saudi Arabia and Iran. Even if a deal is reached, it will simply formalize current output levels and have little significance for the market, Mr Yergin said.

"A freeze would only solidify what the actual production conditions are" when it's agreed, he said. "Countries are going to strive up until that moment to produce to the maximum and if there is a freeze, the freeze will merely capture what's actually happened in the marketplace." 

Regardless of whether Opec announces an accord, supply and demand are coming back into balance in world markets, Mr Yergin said. US crude production will probably slide to about 8.5 million barrels a day as low prices take their toll on drilling, he said, adding that recent output was about 8.7 million a day.

While the oversupply is ending, "an extra billion barrels of inventories" accumulated since 2014 continues to block a rally in prices, he said. 

"The market's main challenge is to work off the inventories," Mr Yergin said. "That's what we'll start to see next year."

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