Crude on Thursday Drops to 4 Week Lows, But The IEA Warns of Impending Price Spikes, Tightening Supplies

IEA reports record drops of new discoveries and investment.

Rather than being a relief to an oversupplied market, news on Thursday that conventional crude discoveries plummeted to a record low of just 2.4 billion barrels in 2016 could lead to an unwanted tightening of global oil supplies, according to the International Energy Agency.

That's because the 2016 drop will likely be followed by a subsequent series of low discoveries, with energy companies having okayed the lowest number of new drilling projects in over 70 years; and with a tightening of supplies could come a sharp price hike every bit as troublesome as the current tepid crude prices.

The IEA in a new report also noted that energy companies in 2016 sanctioned 4.7 billion barrels of conventional oil resources for development, down 30 percent from 2015; 13 percent of conventional oil projects that received the green light last year were offshore compared to an earlier average of 40 percent; and exploration spending is poised to fall for a third straight year in 2017.

Moreover, the IEA believes that the huge increase in U.S. shale production is not enough to make up the shortfall in conventional oil development, with conventional sources accounting for 69 million barrels per day (bpd) of the current global output of 85 million bpd.

Fatih Birol, executive director for the IEA, said in a statement, "The key question for the future of the oil market is for how long can a surge in U.S. shale supplies make up for the slow pace of growth elsewhere in the oil sector."

The report's outlook is ironic to say the least, in light of oil prices dropping on Thursday below their 200 day moving average: West Texas Intermediate dropped 65 cents to $48.98, while Brent fell as low as $50.45.

The drops were attributed to a higher dollar as well as Libya restarting two of its main oil fields, plus news of a large build in U.S. gasoline inventories as refiners pumped a record amount of crude into facilities.

But if the glut fears governing the current oil market is matched only by the potential for outright bedlam caused by tightening supply in the near future, it doesn't over bother Patrick Pouyanne, chief investment officer of Total.

That's because for the short-term at least, he thinks the market will grow less turbulent if the Organization of the Petroleum Exporting Countries (OPEC) extends its cutback initiative to the end of this year, he told Bloomberg television.

He said, "We will see an impact on inventory, and then the market will react" - in the meantime, he added, Total is taking advantage of the current market "where you have a lot of weak players."

Pouyanne's mood earlier this week was notably different: he complained during a conference in Paris that crude prices may fall again due to U.S. shale growth thwarting OPEC's efforts.