Oil prices unlikely to fall much more

Oil prices unlikely to fall much more

Baku, Azerbaijan, Oct. 26

By Elena Kosolapova - Trend: US expert on energy believes it is unlikely oil prices will fall much more.

"I do not think they can fall much more because the current price is already too low relative to the marginal cost of production to encourage much added supply," Kenneth B. Medlock, Fellow in Energy and Resource Economics in the Rice University's James A. Baker III Institute for Public Policy in Houston, Texas and Senior Director in the Center for Energy Studies told Trend.

Kenneth B. Medlock said the price reflects supply-demand fundamentals.

He noted that if the market remains relatively well-supplied through 2016 then oil prices may be at $51 per barrel, as the World Bank forecasts. However, this assumes stability in the current market, and in oil there are multiple possible points of instability. The expert believes that oil price will rise into the $60 range over the course of 2016 as new demands materialize and as US shale production turns over.

Medlock stressed that the price rise will depend on a number of factors, including but not limited to Iranian production post-sanctions, Iraqi production, US supply response to lower prices, elections in Venezuela and Argentina as each have oil resources but require a significant shift domestically to see production gains and global demand especially in Asia and China in particular.

"But, the global inventory situation is the bell-weather for short run price. If inventory continues to build, it is likely that price will fall more. However, this would be very short term as it would trigger, at this point, some real pain in the upstream sector that will result in production decline," he said.

Medlock noted that currently, global inventories continue to build as demand has not been quick to materialize with lower prices and this signals an over-supplied market, which is why prices are low.

It is a confluence of factors, according to the expert. In particular US shale production, gains offset the production disruptions from areas of the world affected by "above ground" issues, such as internal civil strife, oil sector mismanagement, and sanctions. However, US production was not the only to grow, as other supply response to higher prices was seen. Growth in demand from the developing world, especially Asia, absorbed much of the production growth. But, with a recent stabilization and removal of sanctions in certain oil producing countries coupled with negative demand signals out of Asia, significant price weakening has been seen.

"Ultimately, when OPEC decided to not reduce output last year as the market was seeing initial signs of oversupply, the fate was sealed for prices to fall. This will not abate until inventory levels are reduced, through either increased demand or reduced supply," he said.

Medlock noted that given that the market appears to be well over-supplied, a rational step would be an OPEC production cut.

"However, this may take some time as OPEC seeks to re-establish market share as US shale backs off," he said.

The futures prices for crude Brent oil and WTI oil totaled $48.08 per barrel and $44.71 per barrel, respectively as of Oct.26.

This is while the oil prices exceeded $110 per barrel in the summer of 2014. Most analytical agencies do not expect significant growth in oil prices in the short term.

Edited by CN

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