DED chairman: Oversupply of oil to end soon

Abu Dhabi: The oversupply of oil is unlikely to continue for long especially as plenty of shale producers in the US exit the market and Opec (Organisation of Petroleum Exporting Countries) freezes production, according to the head of the Abu Dhabi Department of Economic (DED).

Ali Majid Al Mansouri, chairman of the Abu Dhabi DED, who is also the chairman of the Tourism Development and Investment Company (TDIC), said he expected to see relative stability in the oil market even if demand does not pick up as supply drops.

“The [oversupply] will ultimately wash out. The other side of this equation is demand. If you look at China, seven per cent [growth rate] is still not bad. Once we have the marginal producers in the US of shale oil coming out of the production, supply will start to decline.

Even if demand stays as is, I think prices should cycle up. I’m in the school of seeing higher prices than $43 this year and beyond this year in 2017,” he said.

Oil prices on Tuesday rose above $43 a barrel — their highest level in 2016 — as investors remained optimistic about the possibility of a production freeze at the upcoming meeting in Doha.

Al Mansouri said he expected producers to agree on freezing supply.

As for US shale, he pointed out that producers have a production cost of around $45-$50, which means financing is challenging and the high cost presents risks.

“Today, most facilities that produced shale when prices were at $80-$90 will not go back [to production] if oil stays at $50, $60, $70 because it’s a higher risk. If you look at Baker Hughes’s rig count two years ago, it was 1,700 or 1,800 rigs operating in the US.

Today, there are around 500 [rigs], so there’s a big decline, and this will end up [affecting] the supply in the oil market,” he said.