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USD strength, deflation take charm off low oil prices: IEA

Crude prices have been crashing and the International Energy Agency (IEA) has added fuel to fire by cutting its oil demand forecast for 2015 by a hefty 2.3 lakh barrels per day to 9 lakh barrels a day. Antonie Hallf, head-oil industry at IEA says the Russia accounted for most of the cut, followed by nations such as Venezuela, which depended on local oil production to meet most of their foreign income, .

Normally, low oil prices are a boon to the economy and it may lead to tax cut for consumers, etc. But there are a few upsetting factors this time around, he adds. “The strength of the dollar for instance. In many currencies oil price has not declined as much as in dollar terms because of foreign exchange issues. You have many countries cutting subsidies including India, which is a great move, but that means consumers do not see the full impact of the low oil price. And finally deflation; which is something that most of us have not known except in Japan,” he told CNBC-TV18.

Below is the transcript of Antonie Hallf’s interview with Latha Venkatesh on CNBC-TV18.

Q: You have cut demand growth estimate for 2015 by 230,000 barrels per day, which regions are going to consume less?

A: The country that accounted for most of this cut is Russia. The concern that we have about Russia is that with low oil price, their export revenue is down and this is compounded by the international sanctions that have been slap on Russia after the Ukraine conflict. So, we have reduced our demand growth forecast from Russia and also from neighbouring countries that demand on Russia for their own economic growth. We have also trimmed little bit in other countries which like Russia depend on their own revenue for most of their foreign income for instance Venezuela. So that’s been the concern.

Q: What about the bigger economies China, euro zone. Is there any tweaking, lowering or increase in their estimated demand?

A: It’s a different issue. Normally with low oil price there is a stimulus to the economy and this may happen to some extent, the low oil price is a tax cut for consumers, it’s normally a boon to the economy but there is probably some upsetting factors this time because the general economic context is very weak and also because of number of other issues. The strength of the dollar for instance, in many currencies oil price has not decline as much as in dollar terms because of these foreign exchange issues. You have many countries cutting subsidies including India, which is a great move and we completely agree with but that means is that consumers do not see the full impact of the low oil price. And finally deflation; deflation is something that most of us have not known except in Japan. So it is difficult to access exactly how it is going to play out but in a deflationary environment the concern is that lower prices will feed into expectations of deflation and we will hold back business spending and consumer spending as well.

Q: What about supply estimates for 2015 from Organisation of the Petroleum Exporting Countries (OPEC) and from non OPEC sources?

A: We do not do forecast for OPEC. We do forecast of capacity for the medium-term and we are going to do a new forecast of OPEC capacity in February when we release our next medium-term on market report in 2015.

For non-OPEC we have a supply growth forecast of 1.3 million barrels per day for 2015 which is significant but it’s down a lot from the estimate for 2014 which is 1.9 million barrels per day. 1.9 is a record. We do not see a record year next year but we are not just as yet seeing a big impact of low prices on production from non-OPEC countries.

Q: At what prices do you think supplies will start to go out of production since you have estimated something lower?

A: It is a difficult question and I am not going to try to answer it precisely because there are too many moving parts in this. First of all it is not just the price; it’s how long the price stays at those levels, it’s how much more it has room to go down, it’s only about expectations of prices. So it’s not just about the prices what companies think the price will do. Second, you can compare these prices with costs; costs are moving down as much as oil prices. The cost of things you need for development, production, steel or services everything is going down and efficiency, savings, productivity, everything is going up. So it’s a complicated equation.

Latha: I take your point that it is a moving target, still there must be some threshold level at which some high cost projects have to stop producing?

A: We have looked at this issue for some project and we have found that to these prices some high cost projects, mega projects become challenging but you have to distinguish between projects that have already been funded, those will go through and projects that are yet to be funded and those may be postponed or delayed but it may not affect production now. It will affect the production in few years.

Latha: Still I am groping for some ballpark number – USD 60-65 per bbl?

A: At USD 60 per bbl it is safe to say that some companies will be taking a very hard look at some of their projects and perhaps postponing or canceling some projects.

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