Oil prices could slide over the next three years – before shortages kick in
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Oil prices will start sliding in 2019 says international ratings agency S&P — which won’t please investors.
Predicting oil prices is a notoriously risky business, but the ratings agency has stuck its neck out to speculate that prices will dip to $US65 for European stock and $60 for US production in 2019, and continue to sink over the next three years to touch $US55.
The US price, West Texas Intermediate (WTI) was at $US59 on Tuesday afternoon and Brent, which is pegged to North Sea oil, was just over $US69.
This won’t be happy news to Australian oil company executives.
Many were pegging a revival in Australian oil — a sector that tried and failed to rebound off the back of surging prices in April — to continued global pricing strength caused by OPEC production cuts in 2017.
Investment in Australian oil producers is yet to pick up, as the share prices of companies from Triangle (ASX:TEG), to Buru (ASX:BRU) and Sundance Energy (ASX:SEA) can attest.
Overseas however, companies with strong cash flows and the ability to spend within their budget are all the rage for investors fearful of another decline, S&P says.
Shortages v low prices
Executives in Australia point to low global investment in new exploration, the continued decline of production coming out of Venezuela, Iran sanctions, and low national oil stockpiles as fundamentals driving prices.
Data from the International Energy Agency’s (IEA) World Energy Outlook report on Tuesday supports the Australians’ theory.
It says the number of new oil projects being launched “appears to be geared to the possibility of an imminent slowdown in fossil fuel demand”.
But while the IEA is forecasting passenger vehicle oil demand to peak in the mid-2020s, it says demand generally will be bolstered by industrial and air vehicles.
“The risk of a supply crunch looms largest in oil. The average level of new conventional crude oil project approvals over the last three years is only half the amount necessary to balance the market out to 2025,” the report said.
“Our projections already incorporate a doubling in US tight oil from today to 2025, but it would need to more than triple in order to offset a continued absence of new conventional projects.”
S&P on the other hand doesn’t see that as pushing prices up over the next three years.
“Oil fundamentals remain reasonably favourable owing to the 1.8 million barrels per day of production cuts from OPEC and several other nations,” an S&P oil industry trends report read.
“Despite OPEC slowly unwinding those production cuts, we aren’t too concerned about oversupply because it’s possible Iranian exports could be lower by 1 million bbl/day by mid-summer 2019 and Venezuela’s production continues to decline.”
OPEC has also committed to keeping prices within a band.