Energy spending cuts may usher in recovery

Output from projects already on the books may dry up and pull markets away from the supply side.
By Daniel J. Graeber Follow @dan_graeber Contact the Author   |  Jan. 21, 2016 at 5:40 AM
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CHICAGO, Jan. 21 (UPI) -- The decline in oil prices has led to a steep drop in spending, which could pull markets away from the supply side and lead to recovery, Fitch Ratings said.

Crude oil prices are lower in part because production has outpaced demand. Members of the Organization of Petroleum Exporting Countries have defended a robust production policy by pointing to the eventual return of demand. U.S. production, which in 2014 helped pushed markets toward the supply side, has been more resilient than expected, adding momentum to the downward cycle.

Fitch Ratings said it expected crude oil prices to recover to around $45 per barrel for the year, a price that's a little less than double the current price for West Texas Intermediate crude, which serves as the benchmark for U.S. oil.

For the United States, Fitch said output was supported by production from projects already on the books, though those opportunities are expected to diminish and lead to eventual rebalancing in the crude oil market.

"More broadly, the cumulative impact of two years of outsized global capital expenditure cuts is expected to result in a significant supply adjustment and eventually pave the way for the beginnings of a price recovery," Mark Sadeghian, a senior director for the U.S. energy sector for Fitch, said in a statement.

Analysis from consultant group Wood Mackenzie found about $170 billion in spending through 2020 has been delayed. That means a deferred volume of around 1.5 million barrels per day within five years and 2.9 million bpd by 2025. Those delays mean companies aren't expected to produce new oil from new projects until at least the middle of the next decade.

Adam Sieminski, the head of the U.S. Energy Information Administration, testified earlier this week that balance between supply and demand is unlikely until next year.

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