IEA says downward oil price pressure could build further in 2015

London (Platts)--14Nov2014/634 am EST/1134 GMT

* Energy watchdog sees further price declines as possible
* Downplays risk to US unconventional oil production
* Says oil markets entering 'new chapter'
* OPEC production averaging 30.08 million b/d so far in 2014

The International Energy Agency on Friday said global oil prices could continue to fall into 2015 despite the expectation that some unconventional oil production could become uneconomic at prices under $80/b.

Global oil prices have fallen by more than 30% since mid-June, and in its latest monthly oil market report, the IEA said oil markets were entering a "new chapter" in their history, and that a return to higher prices in the short term seemed unlikely.

"Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015," the IEA said.

On Thursday, Brent crude futures slipped below $80/b for the first time in more than four years, and earlier Friday dipped below $77/b. WTI crude futures were trading Friday around $73.50/b.

"While there has been some speculation that the high cost of unconventional oil production might set a new equilibrium for Brent prices in the $80-$90/b range, supply/demand balances suggest that the price rout has yet to run its course," it said.

US PRODUCTION

Market players have estimated that some US light, tight oil production could become uneconomic at current price levels, including OPEC Secretary General Abdalla el-Badri, who last month said 50% of US light, tight oil production could come off the market as a result of the low price.

But the IEA said production growth was showing few signs of abating.

"While falling prices may well trim investment in US light, tight oil, such potential cuts should not be misconstrued as a production drop, and indeed would likely pale in comparison with recent gains in LTO productivity," it said.

"Cost reductions and efficiency gains in LTO production have been constant, and price pressures would only provide more impetus for producers to cut costs further."

The IEA said that steep price declines tend to be "self-correcting" over the long run as spending is cut eventually or production is otherwise disrupted.

But, it said, "such cyclical factors take time to unfold, however, and should not blind us to the deep structural changes at work in the oil market."

"Economic development no longer spurs oil demand growth as it once did, especially in the absence of wage gains. China, the top source of incremental oil demand in recent years, has entered a less oil-intensive stage of development, while years of high prices have let innovative technologies unlock untold resources in North America and likely soon elsewhere," it said.

"The steeper they are, the less sustainable oil price swings tend to be. But a return to previous price highs may not be a close prospect, as it is increasingly clear that we have begun a new chapter in the history of the oil markets."

DEMAND LARGELY UNCHANGED

Another key factor in the global oil picture is projections for future oil demand, and the IEA on Friday left its global oil demand forecasts for this year and next largely unchanged, revising up the estimates for both 2014 and 2015 by just 40,000 b/d.

The IEA said world demand for this year was now estimated at 92.44 million b/d compared with a forecast of 92.4 million b/d in last month's report.

For 2015, the IEA said global oil demand was expected at 93.58 million b/d, up from a previous estimate of 93.54 million b/d.

Global supply in October averaged 94.2 million b/d, up 35,000 b/d on the previous month.

The agency said it was also sticking with a forecast that demand growth would rise to an estimated 1.1 million b/d in 2015 having hit a "five-year low" of 680,000 b/d this year.

"Accelerating global momentum is foreseen in 2015, supported by the International Monetary Fund's assumption of a macroeconomic uptick." the IEA said.

"A particular product switch is anticipated in the bunker fuel market, from heavier sulfur fuel oil to marine gasoil," it said.

The IEA also trimmed the "call" on OPEC crude for 2015 by 100,000 b/d to 29.2 million b/d.

OPEC OUTPUT

OPEC output eased by 150,000 b/d in October to 30.60 million b/d, the IEA said, still "well above" the group's official 30 million b/d production ceiling for a sixth month running.

For January-October 2014, OPEC production has, however, averaged 30.08 million b/d, almost exactly the group's supply target.

OPEC kingpin Saudi Arabia, the IEA said, produced 9.68 million b/d in October, down 50,000 b/d from the previous month.

Pressure is building on OPEC to reduce output due to the sharp fall in global oil prices, the IEA said, "but there appeared to be no clear consensus on a formal supply cut at the time of writing." OPEC meets in Vienna on November 27 to discuss its oil production policy.

The IEA also said that OECD industry oil stocks built counter-seasonally by 12.6 million barrels in September.

Their deficit versus average levels, after ballooning earlier this year, fell to its narrowest since April 2013.

"Preliminary data show that despite a 4.2 million barrel draw, stocks swung into a surplus to average levels in October for the first time since March 2013," it said.

--Stuart Elliott, stuart.elliott@platts.com
--Edited by Maurice Geller, maurice.geller@platts.com

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