The International Energy Agency says the price of crude, which plunged since June, will end fairly soon, but cautions oil producers that they won't see a barrel of oil selling at over $100 as they did before the crash, the International Energy Agency (IEA) reports.
The cause of the decline was a case study in elementary economics: The supply of oil rose dramatically due to prodigious production in the United States, while sluggish economies, particularly in Europe and China, depressed demand. Now there is a glut, North American drilling is being curtailed and energy companies are slashing spending.
The situation was made worse when OPEC, led by Saudi Arabia, decided in November to maintain production at the 3-year-old limit of 30 million barrels a day. The idea, eventually confirmed by Saudi Oil Minister Ali al-Naimi, was to drive oil prices to the point where expensive oil extraction from shale in the United States would cease to be profitable.
In the IEA's annual five-year energy forecast, issued Feb. 10, the agency said it expects that the world's oil supply will grow by just 860,000 barrels a day by 2020, less than half the increase of 1.8 million barrels a day seen in 2014.
Meantime, the Paris-based agency says, while much excess oil has been held in storage, it will be released as early as the middle of this year as US production declines. But – again, elementary economics – that will put upward pressure on the price of oil, prompting renewed production of US shale oil because extracting it will be profitable again.
"The price correction will cause the North American supply 'party' to mark a pause; it will not bring it to an end," according to the report by the IEA, which advises industrialized countries on energy policy. It said it expects US shale oil to be resurgent as oil prices rebound, rising to about 5.2 million barrels a day in 2020. Volume was only 3.6 million barrels a day in 2014.
But the IEA said the price of oil will be more modest because extracting shale oil, while more expensive than conventional drilling, can be started and stopped quickly enough to prevent dramatic swings in the availability and price of oil.
Antoine Halff, the director of the IEA's oil industry and markets division, explained it this way in an interview with The Wall Street Journal: "We're in a situation where [shale oil] supplies a floor in a downturn because it's quick to respond, but then you see it's as quick to respond on the rebound and provides a bit of a ceiling on prices."
And what of OPEC? Did its price-war strategy work? In London, where the report was released, IEA Executive Director Maria van der Hoeven said in a statement that the 12-member cartel may have recovered some market share lost to US producers, but it is unlikely to return to the heights it enjoyed before the global financial crisis in 2008.
And that's all to do with the flexibility of shale oil. "This unusual response to lower prices is just one more example of how shale oil has changed the market," van der Hoeven said. "OPEC's move to let the market rebalance itself is a reflection of that fact."
By Andy Tully of Oilprice.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.