High supply and weak demand mean prolonged downside risk
- Average oil prices will range between $52 and $63 a barrel over the next five years, according to the IMF
- Strong supply from shale oil and weak global demand will keep prices at current levels
- Governments of oil-exporting countries will be forced to cut budgets substantially
Global oil prices will stay low oil for the next five years as a result of strong supply and persistently weak global growth, according to the Washington-based IMF.
In a report published on 21 October, the fund said it expected the Average Petroleum Spot Price (an equally weighted average of West Texas Intermediate [WTI], Dated Brent and Dubai Fateh) to be $52 a barrel in 2015, increasing gradually to about $63 a barrel by 2020.
Improving shale oil technology, the anticipated lifting of sanctions on Iran and Opec policies designed to protect market share are all putting downward pressures on prices, according to the IMF.
At the beginning of 2015, there was a lot of confidence about Opecs plan, that if you keep production you will see higher-cost producers exiting the market and this will help to rebalance the market, said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB), speaking at the launch of the IMFs Regional Economic Outlook for the Middle East and Central Asia.
Weve seen efficiencies in the shale oil market in the US, and demand has been quite weak. So we havent seen that adjustment.
US shale production is expected to impose a ceiling on oil prices as production can be quickly ramped up when global crude prices rise.
Demand for oil grows at about 1 million barrels a year, but US shale oil is producing 5 million barrels a year, says Shankar Viswanathan, formerly group executive director and CEO of UK-based lender Standard Chartered in Europe, the Middle East, Africa and the Americas. Shale oil costs are going down and technology is improving.
Iran is expected to increase production by 600,000 to 900,000 barrels a day (b/d) when sanctions are removed, exerting a downward pressure on prices.
On the demand side, the IMF expects continued weakness due to a shaky global economy and slowing growth in emerging markets including China.
Middle East oil exporters need to plan for oil prices below $60 a barrel in the medium term and should implement budget cuts in 2016, according to the fund.
Governments were optimistic and set expansionary budgets in 2015, but now they are looking at what needs to be done, said Malik. They do not have the same spending capacity, and because public spending is the largest motor of growth, non-oil sector growth is also slowing.