Chevron CEO: Oil markets will balance

What's next for Chevron?
What's next for Chevron?

Oil markets will balance out in the coming months as cuts to capital investment by the big oil companies lead to a drop in supply, according to the chief executive of energy giant Chevron.

Speaking to CNBC, John Watson, chairman and CEO of Chevron, explained that oil prices are ultimately the results of supply and demand.

A huge, global oversupply of oil caused prices to collapse in mid-2014 from above $100 a barrel. On Tuesday, Brent crude futures traded around $43 a barrel.

Chevron CEO John Watson
Eric Piermont | AFP | Getty Images

As a result of low oil prices, investment has been withdrawn from the sector, according to Watson.

"We are in a resource business that declines over time without capital. And so new projects have been slowed down but also a lot of short-cycle spending," he told CNBC's Matt Taylor.

"The shale oil developments in the U.S., what we call infill drilling in the business, that has slowed down measurably. And we're starting to see a supply response 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 prospect of an output freeze is to be discussed, as a "wildcard" that may affect oil prices in the short term.

"What will OPEC do and what will the producing nations do and will there be some collaboration by those nations to limit increases in supply or reduce supply and that can affect prices," he said. And "But ultimately, it's going to come down to supply and demand and I think markets will come into better balance."

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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 for a long time and it's entering a new phase. It's maturing and we're in a spot right now where many projects are coming online," he said. "The world's going to need energy going forward. LNG production is expected to double over the next decade."

Prices for natural gas have steadily fallen in recent years. Year to date, the commodity's price has dropped 20 percent. Also, extracting LNG is an expensive process.

"LNG developments are multibillion dollar type of developments and I don't think that will change but we can make them more efficient than they have been," Watson said.

"We can manage those costs very well but there're still going to be large capital commitments that are going to be required because it takes money to liquefy natural gas, transport it [and] re-gasify it in those developing markets."

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