Business/economics

IHS: Markets Will Begin to Balance Next Year

The next couple of years for the oil and gas industry are likely to be defined by mediocre prices. “It is going to take a long time to get back to the good old days," said Atul Arya, senior vice president of IHS Energy, during OTC.

jpt-2016-07-ihshero.jpg
Atul Arya, senior vice president of IHS Energy, discusses oil markets in a presentation at OTC

It may not come as a shock to anyone, but the next couple of years for the oil and gas industry are likely to be defined by mediocre prices. That was the message driven home by Atul Arya, senior vice president of IHS Energy, in a talk at the recent Offshore Technology Conference (OTC).

“It is going to take a long time to get back to the good old days,” he said. “We are in an oversupplied market and, for a change, the fundamentals are working, but it will take us probably all of next year to balance the market.”

Arya discussed at length the many factors affecting prices, and aside from weak demand in China due to its slowing economy, the bigger issues he emphasized involve the role that the Organization of the Petroleum Exporting Countries (OPEC) is playing.

When prices headed south, OPEC responded by pumping out more oil, which “has never really happened in the history of OPEC,” he said. Much of that added production came from Saudi Arabia, which many saw as taking up a defensive position to preserve its market share from higher-cost producers. Many have also seen this decision as a key factor in prolonging the downturn as it deluged an already flooded market.

And while some OPEC member nations are seeing declining production, such as Venezuela, IHS believes the stronger members will more than fill the gap as they add another 2 million B/D of “really low-cost oil” to the market in the coming years.

The bulk of those new barrels will come from the Arab bloc that includes Saudi Arabia, Kuwait, the United Arab Emirates, and Iraq. But the major unknown remains Iran, which Arya said is still having issues accessing financial markets months after the US and European Union removed sanctions that stifled oil and gas production in the country.

“What happens to Iran over this year and next year is going to be hugely important in terms of supply,” he added.

Another cause for pessimism involves the estimated 3 billion bbl of oil in storage around the world. Arya said before a price recovery takes hold, that oil must begin coming out of storage and into the refineries.

On the short list of things that are helping prices normalize is the decline in US oil production. IHS estimates that US production peaked at around 9.7 million B/D last year and will flatten out at around 8.6 million B/D over the next few years. The declines are almost exclusively coming from shale production, which Arya said needs a price point of approximately USD 50/bbl to stabilize.

“It’s a little bit of a chicken and egg situation,” he explained. “If the price doesn’t go up, then we don’t see production going up. But the price has to stay down for that production to go down because of the reactivity of [shale] barrels to price.”