Oil price 'could spike unless investments in industry resume'

Mr Atkinson (centre) of the IEA discussing energy trends with Mr David Hewitt (right) of Credit Suisse and CNBC's Sri Jegarajah yesterday.
Mr Atkinson (centre) of the IEA discussing energy trends with Mr David Hewitt (right) of Credit Suisse and CNBC's Sri Jegarajah yesterday. PHOTO: SINGAPORE INTERNATIONAL ENERGY WEEK

Unless investments in the oil industry resume within the next few years, crude prices could spike back up as demand outstrips supply, said a senior executive at the International Energy Agency (IEA).

"It takes more than US$300 billion (S$410 billion) of investments just to stand still (and maintain current production levels)," said Mr Neil Atkinson, IEA head of the oil industry and markets division, at the launch of the Singapore International Energy Week yesterday.

"There's danger as we are reaching a point where we are barely investing upstream," he added, noting that the significant cutbacks in capital expenditure of oil companies could be "potentially damaging for the global economy".

"If investment doesn't resume in 2017 and 2018, we can see a spike in oil prices as oil supply can't meet demand," said Mr Atkinson.

He said while global demand for oil has slowed, it remains "relatively healthy as a long-term trend".

For now, however, it is arguable that "the worst is over (and) the end is in sight", added Mr Atkinson, who expects the gap between supply and demand to narrow later this year and even find balance in 2017.

Prices of benchmark Brent have rebounded from 12-year lows to above US$40 a barrel in recent weeks, holding steady even in the wake of the Brussels bombings.

"Today's prices may not be sustainable at exactly US$40 a barrel, but in this mid-US$30s and upward range, we think there will be some support unless there is a major change in fundamentals," he said.

But he also acknowledged that risks remain, given the uncertainties surrounding shale production in the United States.

"This is uncharted territory for us. If prices do show signs of recovery, (encouraging) marginal shale producers to stay in business or come back into production, that puts a cap on price growth, and this is going to be a really interesting problem over the next few years or so - exactly what do gradually rising prices mean (for production)?"

He also believes the deal to freeze production among Opec members and other oil-producing countries like Russia - which plan to meet next month to discuss limiting output - could well be "meaningless", given that Saudi Arabia is the only country able to increase output.

A version of this article appeared in the print edition of The Straits Times on March 24, 2016, with the headline 'Oil price 'could spike unless investments in industry resume''. Print Edition | Subscribe