Will Oil Prices Recover?

According to latest findings from the International Energy Agency (IEA), oil prices are likely to stall at $60 a barrel and not increase for two years.

Costs for crude oil had fallen by more than 50% in the last few years, due to a decrease in demand. This was mainly due to the US producing its own oil, in the form of fracking or shale oil.  The lack of demand then led to a rise in supplies which made prices plummet. You can read more information on this topic in: Why Are Oil Prices Dropping?

Fragile recovery

In January 2015, prices had dropped from $115 a barrel in June 2014, to a worldwide low of $45.  This month, the IEA said prices were up by 19%, at $52.86 a barrel. However, the agency warns that despite this small recovery, the growth is fragile and dependant on many factors. One main influence on prices will be how the US continues to develop its shale-oil industry.

The IEA forecasts that by 2020, the US will be producing around 5.2 million barrels a day, compared to 3.6 million barrels at present. However, extracting oil from shale in the US is costly, and much more expensive to produce than crude.

The Organization of the Petroleum Exporting Countries (OPEC) also recognised the importance US shale-oil production plays in pricing crude oil, in todays’ markets. They predicted that oil prices would rise. This however contradicted an earlier estimate in which they predicted a decline.

So far, OPEC has surprised the oil markets by maintaining their level of crude oil production. Experts believe this is targeted at the current weak state of US shale-oil production. OPEC are confident that once this type of oil has been sold, demand for crude oil will rise again. An OPEC official from the Persian Gulf said: “There are strong indications that U.S. shale producers are taking a hit, and by the second half of this year a lot of marginal barrels will disappear from the market and demand will rise for OPEC members,” he said.

Price rebound

Another reason for crude oil prices to recover is that at present, with the cost of a barrel sticking at just below $50, there are very few major oil drilling projects scheduled. As the glut in supplies are used up, this sets the scene for a rebound in prices. 

As for shale-oil in the US, it is predicted that production will slow dramatically at first, but this will increase by 2017. However, the IEA forecast that Russian drilling for crude will fall within the next five years, leading again to a greater demand for crude oil.

It is thought that shale oil from the US will provide a major source of supply from the end of this decade. However, OPEC are hoping that as other supplies take longer to bounce back from low prices, demand for their oil will start to increase. When this does, so will the price.