Oil Prices Unlikely to Let Economies Recover in Short Term

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Oil production. - Sputnik International
As oil prices continue to hit historic lows, experts shared their opinion with Sputnik on why the situation in oil sector is unlikely to improve over the short term.

MOSCOW (Sputnik), Anastasia Levchenko — In mid-January, market prices for benchmark Brent and WTI crude dropped to a 12-year low, sliding below the historic level of $30 a barrel.


Adrian del Maestro, a lead researcher for oil and gas at PwC’s Strategy, said the oil prices were likely to remain "depressed" and continue falling given concerns over Iran's return to the global oil market after sanctions' relief.

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Earlier in January, the European Union, the United Nations, and partially the United States lifted their sanctions against the Islamic republic after the International Atomic Energy Agency verified Tehran’s compliance with a nuclear agreement reached last July. The lifting of sanctions allows Iranian oil producers to re-enter the energy market.

"Supply may recover in a short term very quickly with a geopolitical event or an unexpected supply disruption. But in terms of long term decrease in the price, I think we will be looking into at least another 12 months," del Maestro said.

According to the researcher, a number of US producers, who will suffer from lowering oil prices, are likely to cause "a more dramatic drop" in the US oil production, which could lead to the weakening supply.

Denton Cinquegrana, the chief oil analyst at Oil Price Information Service, does not expect any significant increase in oil prices in 2016.

"My forecast for WTI futures for 2016 is $37.50. Do not see WTI futures getting much higher than say $46/bbl this year and Brent should average $2-3/bbl better than WTI," Cinquegrana said.


Del Maestro does not believe that the appearance of the US or Iranian oil at the European market is due to be blamed for further prices decline, but rather the sentiments around it.

In the first week of January, the United States sent its first two shipments of light crude oil after the 40-year oil export ban was officially lifted in December. At the time the ban was lifted, WTI prices nearly converged with Brent crude prices. That narrow spread has remained through January.

"The critical reality is that the US is unlikely to export a large amount of oil now, given the low prices. And likewise with Iran. There will be some time lag for Iran is able to bring more infrastructure to the degree to be able to produce and export a much larger amount of oil," del Maestro said.

Cinquegrana warned that any new competition would negatively affect the oil prices.

"I do not see many exports from the US going to Europe. Iran is looking to take its place near the top of OPEC [the Organization of Petroleum Exporting Countries] production again with sanctions lifted they are going to move as quickly as possible to start gaining oil revenue," Cinquegrana said.

Iranian oil exports are expected to add 600,000 barrels a day to the market by mid-year, according to the International Energy Agency.


According to del Maestro, to decrease the oil supply is not the only obstacle on the way to raising oil prices, as the global demand will not necessarily rise.

"Historically, China has been the drive of all demand, and their economy is now undergoing quite a radical change. So it’s difficult to see the demand for oil picking up on the back of China," del Maestro said.

Cinquegrana said that "a massive spike" in demand was unlikely.

"Innovation or technological advances will only help keep pressure on [oil] prices doing more with less essentially. Other innovations like alternative fuels and electric cars will also keep pressure on oil prices," the analyst said.

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Del Maestro said that Saudi Arabia would face difficulties with changing its strategy of "squeezing" the marginal producers, namely Iran and the United States, in its attempts to go for market share.

"OPEC needs to have a degree of unanimity and consensus among OPEC producers, and it’s hard to see now given some of the geopolitical tensions between Iran and Saudi Arabia. So it will be quite challenging to reach a coordinated agreement here," the researcher said.

The average production of all OPEC members at the end of 2015 stood at 31.846 million barrels a day, exceeding OPEC's own quota on daily production, which amounts to 30 million barrels.

According to del Maestro, non-OPEC producers will also "struggle to get some kind of consensus."

Daily production in non-OPEC countries in December fell by 650,000 barrels to 57.4 million barrels a day.

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