Oil markets are expected to stabilize in the coming months as decreases in investments by oil companies will produce a drop in supply, according to the chief executive of energy giant Chevron.
Chevron CEO John Watson said that oil prices are always the results of supply and demand. A global over-supply of oil pushed prices to collapse in mid-2014 from above $100 a barrel. On Tuesday, Brent crude futures traded around $43 a barrel.
As a result of cheap oil prices, investments were reduced from the industry, according to Watson. "We are in a resource sector that diminishes over time without capital. And new projects have been slowed down but also a lot of short-cycle investments. The shale oil developments in the United States, what we call infill drilling in the business, has slowed down dramatically. We're starting to see a supply reaction that will bring markets into better balance." Watson described this weekend's meeting in Doha between several OPEC and non-OPEC oil producing nations, where the idea of an output freeze is to be discussed, as an intangible that may affect oil prices in the near-term. "What will OPEC do and what will the other nations do and will there be some cooperation by those nations to reign in increases in supply or reduce supply that can affect prices," he said. And "Ultimately, it's going to come down to supply and demand and I think markets will come into better balance."
Watson also discussed the prospects for liquified natural gas (LNG). Chevron has an LNG plant in Australia to develop the Gorgon gas field. "The LNG business has been around a long time and it's entering a new level. It's maturing and we're in a place now where many projects are coming online," he said. "The planet is going to need energy going forward. LNG production is expected to double over the next 10 years."
Prices for natural gas have dropped in recent years. Year to date, the commodity's price has dropped 20%. Also, extracting LNG is an expensive undertaking. "LNG developments are multi-billion dollar developments and I don't think that will change but we can make them more productive than they have been," Watson said. "We can manage those expenses very well but there are going to be large capital costs that are going to be necessary because it takes money to liquefy natural gas, transport and re-gasify it in those developing areas."