According to Colin Welsh, head of international energy investment banking at Simmons & Company International, increasing oil prices are most certain, assuming we dodge another global recession in the economy.
Recent data shows an acceleration in production declines with onshore oil fields within the US; Welsh predicts, “We could well see year on year production down by 1 million barrels per day by the end of 2016. It’s also reasonable to expect decline rates from conventional oil production globally to be higher than normal because all oilfields naturally decline. If they’re starved of investment they decline much faster. In the meantime, demand for oil is continuing to grow by 1.2 million barrels per day, particularly in the US, China and India.”
Although production proves to be declining in certain areas of the sector, Welsh expects’ balance in the industry by next year. He continues, “Irrespective of what happens in Iran the market should fall into balance in the first half of 2017. Markets always move in anticipation of changes in fundamentals. That’s why the record short crude positions have come off already and prices are already lifting. By the end of this year many analysts expect $60 crude. In the interim, expect prices to be volatile as the market weighs the extent to which shale production in the US comes back as prices lift, and the pace at which Iran can lift its production.”
He believes we have not seen the last of hiked oil prices due to diminishing reserves. “The collapse in oil prices has demolished investment in new projects, the results of which will be felt in terms of diminished reserves and lower production in two or three years’ time. At that point the market could become very tight in which case a spike in oil prices to previous highs is not out of the question.”
Bernard Looney, BP’s Upstream Chief Executive, echoed Welsh’s sentiments at Monday’s OTC conference in Houston, Texas, explaining oil price will not be low forever and will eventually resume normality.
Article written by HEI contributor Marcela Abarca.