Markets will witness significant volatility in oil prices this year, says Fatih Birol, Executive Director, IEA.Speaking to CNBC-TV18’s Shereen Bhan on the side-lines of The World Economic Forum in Davos, Birol said the interplay between Middle East oil producers and high cost oil producers will result in price rebalancing in first half of CY17.Birol expects oil prices to shoot up in the near term given Saudi Arabia and Iran stick to their production cut agreements. However, he added market forces will come to play a role subsequent to rising prices, which in turn might result in higher supply again putting downward pressure on prices.In November 2016 Saudi Arabia and Iran at an Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna pledged to remove 1.2 million barrels a day from global oil production, since then crude oil price has been on the uprise. Below is the transcript of Fatih Birol’s interview to Shereen Bhan on CNBC-TV18.
Q: Let me start by asking you about asking you about what you made of the Organization of the Petroleum Exporting Countries (OPEC) monthly report which has now raised the global forecast to about 95.6 million barrels per day. You are putting out your own forecast later today. Does it align with what the OPEC says?
A: We expect a few surprises in our report. The first one is oil demand growth is coming stronger. Among other reasons, a bit of recovery in Europe we see in the oil demand growth. India continues to be strong in terms of demand. But the news is the US oil production which declined last year in 2016, now reversing the trend and 2017, this year, US production is going to increase significantly. And this will give a different dimension to the oil market discussions.
Q: Can you quantify for us when you say that the US production is expected to increase significantly, what would that mean?
A: We will announce this in two hours’ time, but it will be a couple of hundred thousand barrels per day and if the prices remain at these levels or above, I can expect that we can revise up this number in the next months to come.
Q: So, what then is the price outlook, because if I were to look at what happened in 2016, prices were up about 48 percent? Given what you are telling us in terms of both demand as well as output, what should we expect in terms of prices?
A: Last year, when we met here, the prices were USD 28 per barrel. And this year, we discuss it at times that this is not a price that is sustainable and this indeed, we came to USD 55-56 per barrel. And if the current market dynamics are such, as I told you, increase of demand, 1.4-1.5 million barrels per day, if the OPEC countries implement what they agreed, we may well see a rebalancing of the market in the first half of this year. But, what will happen in the second half will be depending on the level of additional production coming out of the US.My message is there will be an interplay between the Middle-east producers and the high cost places such as US and Brazil which means that we are entering a period of greater oil price volatility. This is important for countries like India because it will affect the trade balance, it will affect the inflation, therefore economic policies need to take in account the greater volatility in the oil prices, ups and downs and swings.
Q: When you talk about this greater oil price volatility and the fact that we are headed into that, what would that mean in terms of a price band then? Are we talking about USD 45 to USD 65 per barrel? Where do you see this?
A: By law, I cannot forecast the price, but what I can tell you is that I expect that in case of producing countries sticking to their agreements, there may be a room to see the prices higher for some time to come, higher than these levels. But, the market response may well be strong to that which means these high prices bringing new supplies from the US, from Brazil, from other countries which pour in the markets and put downward pressure on the prices. So, ups and downs and therefore, less of volatility around the price levels you just mentioned.
Q: You were talking about the OPEC deal. In terms of compliance, what is the expectation? Do you expect significant compliance with what the OPEC has announced in terms of the output cut?
A: It is of course, up to those countries to answer your question, but if they stick to their agreements, what they have decided together with some non-OPEC countries like Russia, I would expect it would continue to put upward pressure on the prices and as such, we will see in a few months, the stocks diminishing and we are going to turn to a rebalance of the markets.
Q: Speaking of supplies from Iraq, Nigeria, etc. what is the expectation there that you are working with?
A: Nigeria is going through difficult times such as Libya, there is some cuts as a result of internal issues. So is Iraq. In fact, when we look at the last few years, together with the United States, Iraq was another centre of growth of oil supply. But, Iraq is going through difficult days, internally today. But despite it increasingly the production, maintain the production which is very important because Iraqi government needs revenues in order to address some of the internal domestic issues, geo-political issues which are very serious. So, as such, the news which will come from Nigeria, Libya is because of the domestic oil supply shortages, plus the geo-political events in Iraq should be watched very closely.
Q: We are 24 hours away from President Trump now being in the White House officially. What will a Trump presidency mean as far as global oil and gas markets are concerned?
A: I believe it is a bit too early to make any clear judgements or statements on that. But based on the discussions I have with the members of the new US administration and the policies the new administration already announced, I would expect that US oil and gas production which is already strong will be much stronger and US may well be a power house in terms of global oil and gas production and exports.
Q: What is the outlook then for shale in this context?
A: I believe shale will be a keyword in the new administration because US has a huge shale resources both for oil and gas, but the missing things such as the, within US, the pipelines bring the shale oil and gas to the consumption centres, to the centre for exports, plus the export licencing is going a bit slowly, perhaps, speeding up those within new administration may well mean that the US shale oil and shale gas may well meet the consumers outside of US in a bigger terms.
Q: So, let me end by saying the headline for 2017, the world should brace itself for greater volatility in the oil market?
A: It is my conviction that we are entering a greater oil price volatility, therefore, the countries like India which import a lot of oil and some gas need to design the energy and economic policies accordingly. You are making a lot of efforts, Indian colleagues. I discussed with my contract partners, Mr Goyal, Mr Pradhan, they are doing excellent work, but a greater volatility is on its way.
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