Singapore - The world is in uncharted territory where oil prices are concerned, a senior executive of the International Energy Administration (IEA) has said.
Neil Atkinson, the agency's head of the oil industry and markets division, said the oil industry has struggled to understand the shale phenomenon in the United States, and has failed, firstly, to foresee how rapidly it would grow, and secondly, how resilient oil production has stayed, even as oil prices tumbled in the last 18 months.
Speaking at the launch of the Singapore International Energy Week 2016, he said: "The third element to this is, when recovery does come, how quickly will the US be able to resume growth? This is a major, major uncertainty governing our analysis in the next few years."
Any sign of recovery will encourage marginal shale oil producers to stay in the business or return to production, putting a cap on further price growth, he told reporters later.
This makes it extremely difficult for the industry to forecast how oil prices would react in future. "This is going to be a really interesting phenomenon over the next year or so, and we're all learning about it every day," he said.
The IEA, the energy watchdog for industrial nations, is expecting both the Brent and West Texas Intermediate crude benchmarks to average between US$35 (S$48) and US$40 a barrel this year.
"On that basis, it's difficult to see certain portions of the shale producers staying in business.
"But it's a moving target because their ability to cut costs, refinance and hedge production from 2016 to 2017 shouldn't be underestimated."
Brent oil has rebounded from a 12-year low of about US$29 a barrel in January this year; it gained more than 50 per cent after Russia, Saudi Arabia, Qatar and Venezuela made provisional agreements to freeze supply at January's levels, catalysing a change in sentiment in the oil market.
Brent futures traded at US$41.40 a barrel at 7pm Singapore time on Wednesday; the US West Texas Intermediate benchmark traded at US$41.
The agreement could be widened to include other major oil producers, with the Organisation of the Petroleum Exporting Countries (Opec) and major non-Opec producers expected to meet in Doha on April 17 for another round of talks.
But it is uncertain whether this meeting would take place, said Mr Atkinson, noting that a meeting scheduled for March 20 in Moscow failed to happen.
Regardless of that, a freeze in production is "meaningless" because only Saudi Arabia has the ability to raise production if it wants to, he said.
The path toward collaboration among the oil major producers has been strewn with plenty of roadbumps. Opec officials had earlier said that any deal would be conditional on Iran joining in - an unlikely prospect as the country seeks to boost its production to pre-sanctions levels.
But The Financial Times, quoting an unnamed senior Opec delegate, reported on Wednesday that Saudi Arabia is prepared to go along with an output freeze without Iran.
Libya on Tuesday indicated that it would skip the meeting, as it was also working on returning to pre-conflict production levels.
The IEA is expecting Iran to lead most of the output growth from Opec in the five years to 2021, and its capacity to rise by one million barrels to 4 million barrels a day by 2021.
The country has in the first quarter boosted oil output by 300,000 barrels a day, in line with the IEA's estimates, said Mr Atkinson, who is expecting Iran to add another 300,000 barrels a day by the third quarter.
"Iran hasn't exactly been flooding the market with lots of oil. It seems to be far more measured," he said.
Iran officials had earlier said the country would add a total of one million barrels a day this year.
The oil producer could have under-estimated the difficulty of marketing into over-supplied markets, and regaining its market share from Saudi Arabia, Russia and Iraq, which have grown their outputs in its absence, said Mr Atkinson.
The veteran analyst also reiterated a warning that the IEA had sounded earlier - that two straight years of capital expenditure cutback in the oil industry could raise the chances of a oil price spike in a few years, potentially hurting the global economy.
Nearly US$400 billion of spending on new oil and gas projects have been shelved, noted energy consultancy Wood Mackenzie. The IEA is expecting total upstream expenditure to fall by 17 per cent this year, following a 24 per cent drop last year.
Some US$300 billion in investments is needed simply to maintain oil production at existing levels, much less meet an expected growth in global oil demand, said Mr Atkinson.
"We run the risk that, without adequate investments, there will be major spikes in oil prices towards the end of this decade, which could be very damaging for the global economy. It is perhaps sowing the seeds for a rather difficult situation in a few years."
This article was first published on March 24, 2016.
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