‘Few reasons’ to expect oil’s recovery in 2016, IEA says

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The International Energy Agency heaped another dose of bearish news on the faltering global energy markets by warning that it sees no recovery in oil prices in 2016 and predicted another year of plunging oil development spending.

Speaking on the sidelines of the Paris climate change conference, Fatih Birol, executive director of the IEA, said, "Looking to 2016, I see very few reasons why we can see growth in prices. I think 2016 will be a year where we will have a lower price environment."

The IEA will publish an update on world oil supply on Friday, a day after the Organization of Petroleum Exporting Countries (OPEC) publishes its own update on supply. Both reports may forecast higher oil exports from Iran, which is gearing up to return to world oil markets after years of economic sanctions. "There is a lot of oil in the market now and 2016 demand in the market will be weaker," Mr. Birol said. "And at the same time, we may well see Iran come to the market if sanctions are lifted, which is going to increase oil in the markets."

Olivier Jakob of Swiss energy consultancy Petromatrix said "the accepted neutral consensus" sees Iran boosting its oil exports by about 500,000 barrels a day in 2016. But the figure could vary considerably, depending on how fast the sanctions against Iran are lifted and the investment flows into Iranian oil infrastructure, much of which is in dire need of upgrading.

Oil prices plunged this week after OPEC, led by Saudi Arabia, on Friday failed to endorse production cuts to support prices. On Tuesday, the price for Brent crude, the international benchmark, dipped below $40 (U.S.) a barrel for the first time in more than six years. The American benchmark, West Texas intermediate, fell below $37. On Wednesday, Brent bounced off its low, reaching almost $41. Still, the price is down 38 per cent this year alone. As late as June, 2014, prices were above $100 a barrel.

Mr. Birol's bearish forecast came shortly after the U.S. Energy Information Agency lowered its 2016 forecast for West Texas intermediate crude to $50.89 a barrel from its previous forecast of $51.31. The agency also reduced its forecast for 2015 crude prices to $49.08 a barrel from $49.88.

The IEA, however, left its forecast for U.S. oil production largely intact at 9.3 million barrels a day. American shale-oil producers have proved remarkably resilient in the face of plunging prices, adding to the global oil glut. Overall production, however, is expected to drop to just under 8.8 million barrels a day next year.

Some energy analysts and energy consultants think the OPEC cartel, which pumps out about one-third of the world's oil supply, is becoming increasingly irrelevant as a stabilizing price force. In a new note, Mr. Jakob said the notion of OPEC's traditional role as a swing supplier "is currently obsolete."

Mr. Birol suggested that prices could not stay this low forever because of waning investment in exploration and development. Spending among oil companies fell by about 20 per cent in 2015, as dwindling cash flows forced them to rein in spending, and probably will fall again next year.

"We have never seen, in the last 30 years, two years in a row oil investments declining and this will have a impact on production in the next few years," he said. "We may well see some surprises down the road as a result of lack of investments in oil production."

The IEA fears that low prices for all fossil fuels, including coal and natural gas, will sideline the renewable energy push in some countries. In the developing world, coal is becoming irresistibly cheap, encouraging the construction of coal-fired electricity generating plants. India alone has 120 coal-fired plants either planned or under construction.

"We see the cost of renewables going down, but in a low-oil-price environment, we may well see that some governments may weaken their support for renewable energies or efficiency improvements," he said. "We have been telling governments that it would be an historical mistake to lessen the support on renewables and efficiency as the price of fossil fuels become cheap. Let me be clear, lower oil prices are a risk for the transformation of energy."