Oil price to recover to $80 only by 2020: IEA

Why oil prices won’t recover just yet: IEA Exec Director
Why oil prices won’t recover just yet: IEA Exec Director

Oil prices are set for a slow recovery, according to the latest report from International Energy Agency (IEA), which cautioned against the deep investment cutbacks in the industry.

In its latest World Energy Outlook, the IEA's central scenario for oil prices forecast that the oil market would rebalance at $80 a barrel (bbl) in 2020, "with further increases in price thereafter."

The IEA forecast that demand would pick up slowly to 2020, adding an average of 900, 000 barrels a day per year, gradually rising to a demand for 103.5 million barrels per day by in 2040. That compares with 94.5 million barrels per day in 2015.

It said this subsequent rise after 2020 would, however, be "moderated by higher prices, efforts to phase out subsidies (provided that momentum behind reform is maintained, even as oil prices pick up), efficiency policies and switching to alternative fuels."

IEA Executive Director Fatih Birol told CNBC the organization did not think a world in which the price of oil was stuck at $50 for "many many years" was a likely scenario.

Birol added that Iraq production growth would slow down due to geopolitical turmoil, while growth in Brazil, Canada and Russia would also not be as strong as before.

The IEA forecast that collectively, the U.S., European Union and Japan would see their oil demand drop by around 10 million barrels a day by 2040.

"In terms of exporting...the Middle East will remain crucial," Birol said. Iran could make a significant contribution to oil production once sanctions are lifted, but to see a major expansion the country needed to invest significantly.

Tesoro Oil Refinery, Anacortes, Washington.
Kevin Schafer | CNBC

Oil market analysts will be reading the IEA's report closely given the current ongoing slump in oil prices. Whereas last June a barrel of oil cost $114, today the price is under $50 a barrel amid a glut in supply and a lack of demand.

Major oil producers, such as OPEC (the Organization of Petroleum-Exporting Countries), have also refused to cut production levels (and have often exceeded their daily production ceiling) in order to maintain market share in the face of competition from U.S. shale oil producers.

Read More China's oil appetite to help balance OPEC output

Unable to break-even at the lower price of oil, many U.S. producers have either cut back on production or closed rigs entirely, showing that the OPEC strategy could be working.

The IEA said in its report that current upstream spending (in exploration and production) had declined more than 20 percent in 2015 but it cautioned against more cutbacks.

"An annual $630 billion in worldwide upstream oil and gas investment – the total amount the industry spent on average each year for the past five years – is required just to compensate for declining production at existing fields and to keep future output flat at today's levels. The current overhang in supply should give no cause for complacency about oil market security."

Read More Oil demand growth to slow, IEA says, but is OPEC listening?

If oil prices were to stay in a rut for longer, a scenario which the IEA said could not be ruled out, the oil price in this scenario in this case would remain close to $50/bbl until the end of 2020 before rising gradually back to $85/bbl in 2040.

This lower oil price trajectory was based, the IEA said, "on assumptions of lower near-term growth in the global economy; a more stable Middle East and a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market (as well as a price that defends the position of oil in the global energy mix); and more resilient non-OPEC supply, notably from U.S. tight oil."

Birol pointed to the revolution in clean energy as another major driver in the shift in oil demand. Two-thirds of new power plants will be for renewable energy, Birol said. In addition, the world is becoming far more energy efficient. "Oil demand will not grow in the future as strongly as it did in the past."

He also warned that the 2015 United Nations Climate Change Conference, COP 21, to be held in Paris later this year, needed to provide a "clear signal" to the energy sector that it needs to accelerate investment in clean energy.