© Richard Mallinson
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Even if growth rates in US oil were to pick up again, this would not provide enough additional supply to balance the market for the rest of the decade. Lower prices are having a significant impact on non-OPEC projects outside the US, particularly in high cost regions such as Canada, Brazil and the North Sea. Once investment in these projects is cut, it will impact future supplies for at least 3-5 years.
Given the growth of demand and natural declines of existing production, I expect the market to tighten in 2016. There is the potential for it to become progressively tighter through the rest of the decade depending on how much additional supply OPEC members can provide. If the group remains divided, then prices could remain volatile in the next few years as they will need to overshoot and undershoot more to trigger responses in demand and non-OPEC supplies.
With oil prices having stabilized, for now, at around $65 a barrel, some $20 off their January lows, there is little appetite within the Organization of the Petroleum Exporting Countries to modify production limits, as some analysts have suggested is an outside possibility. How do you personally believe, is OPEC going to cut production at a meeting in Vienna this week?
I do not expect OPEC to alter the production quota at the meeting this week. They will maintain the policy of leaving it to market forces to rebalance supply-demand fundamentals. So far the recovery in prices has been caused by strong demand growth, some oil going into non-commercial stocks and expectations of a supply response. Saudi Arabia, the dominant OPEC member, knows the prices need to stay low for a while longer to ensure non-OPEC supply growth does slow down.
What is your forecast for oil prices for the end of this year?
We forecast Brent prices will average $73 per barrel in the last quarter of this year, $81 per barrel in 2016 and $98 per barrel in 2017, reflecting the tightening in the market and the high cost of incremental non-OPEC supply sources.