Oil producers agree low prices can t last, but not sure about when they ll recover

Oil producers agree low prices can t last, but not sure about when they ll recover
A participant walks past a logo during the World Economic Forumannual meeting in Davos, on Jan. 20, 2016. Fabrice Coffrini / AFP-Getty Images

One thing that oil producers congregating in Davos agree on is that the oil rout can’t go much further. There’s less consensus about when the recovery will arrive.

Officials from Kazakhstan and Nigeria to Azerbaijan and Saudi Arabia, speaking at the World Economic Forum, concur that the global glut will begin to dissipate this year as the lowest prices in 12 years force cuts in spending and production. Even Nouriel Roubini, the economist dubbed “Dr. Doom” for predicting turmoil before the 2008 financial crisis, believes prices will recover in 2016 from their current unsustainably low levels.

“Oil prices can go lower even from current levels but if they’re going lower toward $20 a barrel, I don’t think they can stay there,” Roubini, chairman of Roubini Global Economics LLC, said in a television interview on Friday. “At that point there’ll be producers that cannot produce profitably and they’re going to cut back on production. By year end, it has to be above $40 because the fundamentals do not justify oil at $30.”

Kazakhstan, while braced for the risk that crude will hit $20 in the first six months of 2016, expects a recovery to $30 to $40 a barrel in the second half, Prime Minister Karim Massimov said in an interview. Still, the “era of cheap oil” could persist for another five to seven years and the Central Asian country is prepared to withstand a drop to $16 a barrel, Massimov said.

The qualified optimism expressed on Friday echoes views aired on Thursday by Azerbaijan, Nigeria and Saudi Arabia at an energy-themed discussion.

A price recovery is “inevitable” as crude has overshot to “irrational” levels, with $30 a barrel too low to ensure spending on production, Saudi Arabian Oil Co. chairman Khalid Al-Falih said. Emmanuel Ibe Kachikwu, petroleum resources minister of state at OPEC counterpart Nigeria, predicted a rebound to $40 by the end of the year. For Azeri Prime Minister Ilham Aliyev the price floor is only $2 or $3 away.

Most of the oil executives and representatives of energy — rich nations who met in a closed session in Davos on Thursday agreed the market was oversupplied by about one million barrels a day and that lower spending on new projects would bring supply and demand into balance next year, according to one of the participants who asked not to be identified because the meeting was private.

Oil company executives speaking in public at the Swiss resort have sounded less optimistic. BP PLC chief executive Bob Dudley warned on Jan. 21 that the industry is struggling with a “flood of oil,” while Glencore PLC chairman Tony Hayward predicted things won’t get better until the “supply shock” passes.

If there was still any belief that cheap oil is an unalloyed blessing, it was dispelled by Iraqi Prime Minister Haidar al-Abadi. The OPEC member doesn’t just rely on oil revenues for social spending and infrastructure projects: it’s engaged in a life-or-death battle against the militants of the Islamic State, and will need help from the International Monetary Fund to ride out the storm.

“We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said in an interview in Davos. “We can defeat Daesh but with this fiscal problem, we need the support. We have to sustain the economy; we have to sustain our fight.”
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