Oil prices could drop, warns energy agency
The International Energy Agency is disputing the renewed optimism being felt among highcost producers such as Canada’s oilsands, saying OPEC’s deal to cut output is only a short-term boon for oil prices.
In its monthly oil market report published Tuesday, the Paris-based IEA reiterated that the recent production cut between OPEC and non-OPEC members is a six-month agreement that could easily be revised in mid-2017.
The deals have already sent prices surging, and are expected to quicken the return to market balance. But the report said that the sanctioning of major projects in high-cost regions is as unlikely as ever, as competitors in cheaper jurisdictions continue to lower costs.
“OPEC also appears to be signalling that high-cost producers should not take for granted that they will receive a free ride to higher production,” the report said. “These high-cost producers, who assume that the cuts at the very least guarantee a floor under prices, might think twice before taking the risk of sanctioning new investments.”
Lower oil prices over the past two years have made high-cost regions like Canada’s oilsands, the North Sea and Russian Arctic increasingly uncompetitive with other producers. In the oilsands in particular, where break-even costs are among the world’s highest, the prospects of companies building new megaprojects remains a distant hope.
But recent agreements between oil exporting countries in the Middle East, Africa and South America has boosted oil prices, renewing optimism that some expansion plans might move ahead in 2017.
The IEA pushed back against that assertion Tuesday, warning that prices could again drop sharply if participants fail to meet their production quotas — an outcome that many analysts see as highly probable.
The report said the recent spike in oil prices is mostly due to investors piling into near-term oil contracts, while longer-term contracts remain as bearish as before the OPEC deals, suggesting prices in the long term will follow their current trajectory.
Many analysts see prices for benchmark crude oil averaging around US$55 in 2017 and possibly rising to over US$60 in 2018. Some see prices falling after the first half of 2017, when data on OPEC and non-OPEC cuts become clearer. Analysts at Barclays expect prices for WTI to average US$52 in the fourth quarter of 2017.
For their part, oilsands producers have also made major cost cuts. Break-even costs in the oilsands vary widely, though some producers say current prices are more than enough to recover operating costs. However, most companies still need much higher prices in order to recover long-term capital costs that could justify major project expansions.
The IEA also increased its outlook for oil demand in the report, which boosted prices for crude in Tuesday morning trading.