Yergin: Why oil prices cannot stay this low

Highly divided OPEC unlikely to cut production: Dan Yergin
Highly divided OPEC unlikely to cut production: Dan Yergin

The next two quarters will be tough on crude prices, but 2016 will be a year of transition for oil markets, IHS Vice Chairman Dan Yergin said Friday.

Yergin told CNBC's "Squawk Box" he expects oil markets to begin to balance next year or in 2017.

"The oil market "can't stay low like this because you're not going to have the investment you need," he said." "By 2020, the world oil market is going to need another 7 million barrels a day of production."

"Right now, the whole mantra is slow down, postpone, cancel projects," he added.

Multinational energy companies and U.S. shale oil producers have slashed capital spending in order to protect their balance sheets as their revenues plummet and cash flow dries up. Crude prices began to sink from historic highs last fall, and the downturn accelerated after OPEC announced it would not cut supply to balance oil markets.

Despite expectations that high-priced American crude production would collapse at $70 a barrel, U.S. producers can perform well at $55 to $60 per barrel. However, current prices in the $40 to $50 range are creating "great pain," he said.

Yergin said he does not expect OPEC to change its policy of maintaining current oil output levels to defend market share. The 12-member orgnization is meeting Friday in Vienna.

Why Saudi Arabia won't play nice at OPEC meeting

Crude oil futures rose Thursday on reports that top oil exporter Saudi Arabia would agree to cut production by 1 million barrels a day, provided non-OPEC members also dial down output.

However, a Saudi source said later the report by industry publication Energy Intelligence was "baseless." Iran, Iraq and Russia swiftly rejected any such proposal.

Russia, which does not belong to OPEC, is the world's top oil producers and has been pumping crude at a rate of about 10.5 million barrels per day.

Jittery market eyes OPEC output
Jittery market eyes OPEC output

After years of sanctions on Iranian oil, Iran's leaders have said they plan to bring 500,000 barrels per day to markets as soon as possible, and they anticipate reaching 1 million barrels. The world is already oversupplied with about 1.5 million barrels of oil.

Kurt Hallead, co-head of energy research at RBC Capital Markets, said a Saudi cut was highly unlikely because it would essentially subsidize U.S. production and make room in the oil markets for Iran, the Saudis chief regional rival.

Geologists studying graphical display of oil and gas bearing rock on screens.
The party is over for oil

Oil prices may be range bound for years, he told "Squawk Box" on Friday.

"I think this is more like the period of 1991 to 1994, where you had about a three-year period of capacity absorption before the supply and demand lines kind of crossed again," he said.

In his scenario, prices would move up and down between current levels and roughly $60 per barrel.