Oil prices will be largely driven by US shale, demand from new consumers led by India and the return of geopolitics in 2019,Fatih Birol, the executive director of the International Energy Agency, predicted on Tuesday in Singapore.
Under such a scenario, Birol said this would be bad news for oil markets as they are likely to become more volatile.
Despite oil prices being largely determined by OPEC’s output cuts in the past year, he also said that US shale is one of the “completely new and major factors” that will bring volatility to oil markets in the longer term. “US shale is very price elastic and we will see a substantial amount of oil from the US continue to flow into global markets,” he said.
On increased demand from consumers like India, he said the country was making the “right energy policies” which was moving to the center stage of global energy affairs rapidly.
Also, the recent drop in oil prices by around $10 per barrel was also regarded as a welcome change, because it gives breathing room to oil consumers, but Birol said the market is not out of the woods yet and the coming months will be very challenging.
Brent crude futures traded at $76 per barrels on Tuesday. In early October, Brent crude had crossed the $86 per barrel mark on the back of geopolitical tensions, its highest since 2014.
“We are going through very challenging times in oil markets,” Birol said, citing three important factors at play: oil demand that is still very strong despite signs of slowing growth, supply constraints like Iranian exports in decline and Venezuelan production in freefall, and tightness in markets as Saudi spare capacity has shrunk.
Saudi Arabia’s spare production capacity, the key cushion in the global oil market, has fallen to levels that are very worrying, Birol said on the sidelines of the Singapore Energy Conference.
“I have the confidence that other producers will come in the picture, especially the Gulf countries, and comfort the markets,” he said.
Markets have been concerned about Saudi spare capacity for several weeks, with the kingdom under pressure from the US to raise crude output to cool rising prices. Earlier this month it said it was pumping 10.7 million barrels per day, near its all-time high.
Once Saudi Arabia’s crude production reaches 11 million barrels per day, the kingdom’s spare capacity will be at the lowest level since it stood at one million barrels per day in January 2006, according to Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp.
Birol added that Iran’s exports have seen a significant decline from the last peak of about 2.4 million barrels per day and will continue to decline through November 5, when US sanctions on Tehran’s petroleum exports kick in.