Kitakyushu, Japan —
* Fall in upstream oil investment could lead to future price spikes
* Recent rally in oil prices supported by fall in non-OPEC production
* Urges G7 countries to find ways to encourage oil investment
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US oil production could recover if prices rose to $60-$65/b but the impact would not be immediate, International Energy Agency Executive Director Fatih Birol said May 1.
In an interview with S&P Global Platts on the sidelines of the G7 Energy Ministerial meeting in Kitakyushu in southwest Japan, Birol said that even if oil prices climbed over $60/b, US crude production would take six to 12 months to rescind the current trend of falling output.
"It will take a lot of time to bring the logistics, the rigs, the workers together so we think we may need six months to one year [for] US oil production to come back and see a reverse in the trend of a decline. It will not be from one day to another," he said.
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Analysts have said that some of the US shale oil production that has fallen in the past year could come back if prices rose sharply above $50/b. But some have remained wary about the resilience of shale oil, as US crude production has fallen steadily in the past year.
In its April monthly report, the IEA said US tight oil production fell by as much as 450,000 b/d year on year in March as low oil prices took their toll and rig counts tumbled.
In IEA's annual medium-term oil outlook report, published in February, it had forecast US light tight oil production to decline by nearly 600,000 b/d.
However Birol said he expected US crude oil imports to increase further, especially with strong oil demand growth bolstered by robust US gasoline demand.
"[US] gasoline demand is growing strongly, [it is] 4% higher [now] than in the last few years, as a result we may see a temporary increase in US oil imports," he said.
US crude oil imports have risen in recent months amid the backdrop of falling US production, and as refineries in the US have steadily increased their appetite for West African and Middle Eastern crudes.
Birol said the recent recovery in oil prices was supported by the fall in non-OPEC production and the rise in oil demand.
"We expect to see a 700,000 b/d decline in non-OPEC production, the biggest decline in non-OPEC production in the last three decades. Secondly, we also expect an increase in oil demand, about 1.2 million b/d, which is healthy and [this] is slightly higher than the historical average," he said.
Crude prices hit a six-month high late last week, buoyed by a weaker US dollar following US Federal Reserve and Bank of Japan decisions to stand pat on monetary policy.
Oil prices have staged a dramatic recovery after they fell to a near 13-year low in late January as analysts have grown increasingly optimistic of a gradual rebalancing of the oil markets, supported by a steady fall in non-OPEC production, especially US crude production.
Birol also said the recent rally in oil prices were accelerated by physical outages in Nigeria, Kuwait, UAE and Venezuela.
But he said these outages should remind the market that supply-demand balances can change quite fast.
"These outages could have happened in a time period when there were not enough stocks in the market which could lead to spikes and difficulties and tensions in the market," he said.
"These are the reasons why it is important that all countries should be paying enough attention to security and this should be indexed to the oil prices."
ICE Brent has recovered more than 75% from a near 13-year low of $27.10/b in late January, fueled by initial hopes of an output freeze by major producers. But despite the absence of a freeze agreement, oil prices rose supported by the outages in key oil producing countries.
Birol reiterated that the IEA expected the re-balancing of the market to take place towards the second half of this year or latest by 2017.
G-7 AND ENERGY SECURITY
Birol also said that energy security was one of the key talking points at the G7 Energy Ministerial meeting where energy ministers from the G7 -- Canada, France, Germany, Italy, Japan, the UK and the US -- have gathered in Japan over May 1-2.
He was concerned that the current decline in upstream oil investments would lead to higher prices in the future, and urged G7 governments to take some measures, especially fiscal and necessary measures, to address these issues.
"We are worried this may create some spikes of price in the future, and provide volatility in the oil markets, therefore we are going to urge governments to take necessary measures to address this problem," he said.
He called on the G7 member countries to undertake fiscal and labor policies to facilitate investment in the upstream oil sector, which has seen investment fall sharply since the oil price fall began in June 2014.
"We [have seen] a substantial decline of oil investments, about 40% in two years, which has never been a seen," he said.
Birol also said that low oil prices had stimulated strong demand, especially in key refining hubs like US, India and China, boosted by strong global refining margins.
This this would support refineries in Asia and increase competition in this region, which would be beneficial for the end consumers, he said.
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