IEA Sees Risk of Volatile Oil Prices on Weak Investment

A dearth of new investment in oil production is stoking a risk of tighter crude supply and unstable prices, even as demand growth is expected to slow over the next five years, a senior International Energy Agency official said.

"But the worldwide cushion of spare production capacity will shrink without further investment in exploration and output," Neil Atkinson, the head of the IEA’s oil markets and industry division, said on Sunday at a conference in Manama, Bahrain.

“There are still not enough signs of investment beginning to return and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices,” he added.

The IEA official noted that there is at least a possibility of going back to the situation faced 10 years ago when oil prices were very high at a time when demand was growing.

The IEA, which advises most major economies on energy policy, increased its estimate for demand growth in 2017 by 1.7%, it said on Wednesday in a report. Atkinson said the pace of growth will slow but possibly from a higher base than the agency thought a few months ago. The Organization of Petroleum Exporting Countries and suppliers, including Russia and Bahrain, agreed in December to curtail output to clear a global glut, led partly by US shale production. They extended their accord through the first quarter and may consider prolonging the cuts further.

Benchmark Brent crude, which has lost 2.1% this year, ended last week $1.84 higher at $55.62 a barrel in London trading, in its third consecutive weekly increase. Oil prices at current levels are “better” but still not spurring investment, Mohamed bin Khalifa al-Khalifa, Bahrain’s oil minister, said at the conference. “There is a supply challenge coming up.”

Atkinson said prices have “apparently bottomed out”, though he questioned the speed at which US shale output will rebound.

“There are very wide divergences of views,” Atkinson said.

 “We underestimated the resilience of US shale producers. We failed to understand the resilience. We failed to appreciate the technical ingenuity.”