In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

'The world is floating in oil', says analyst

20 November

"Oil market sentiment has turned back to 'max-bearish' mode," the London-based firm Energy Aspects said in a client note yesterday. "Talk of $20 oil is back."   

The consultancy isn't the only harbinger of doom for the oil market at the moment. Goldman Sachs warned this week of "elevated risks" that an oil price of $20 a barrel – which the Daily Telegraph describes as "the so-called ‘cash cost’ that forces drillers to abandon production" – is looming in the near future.

Could the oversupply get worse?

Why is sentiment so low, when only recently many experts were confidently talking of the oil price having hit an unsustainable low? It's all down to persistent oversupply – and fears that the oil crisis is about to get a whole lot worse.

On Wednesday, a report from the US energy watchdog revealed a 300,000 barrel build in stockpiles last week – a quantity that's small compared to the recent past, but represents the eighth consecutive week of increase. The stockpile comes as a surprise after a commercial report on Tuesday indicated that a fall was imminent. The latest numbers also reveal that US output of oil remains almost flat at 9.1 million barrels a day, confounding experts who have long predicted that the low oil price would kill expensive shale production and help to rebalance the market.

And that’s only the tip of the iceberg. One official estimate reckons that with domestic storage facilities in the US and elsewhere near record highs, "at least 100m barrels are now being stored on tankers offshore, waiting for better prices", according to The Telegraph.

"The world is floating in oil, and commercial stocks on land are at a record high,” says David Hufton, head of the oil brokers PVM Group. "The numbers we are facing now are dreadful… This is unprecedented."

Future projections for demand and supply are also mixed. The return of the El Nino weather phenomenon has led to predictions of a drop in demand for heating in the US, especially this winter. Elsewhere, Iran is about to rejoin the global economic fold and is thought to have a backlog of 30m barrels of oil to shift.

Are there grounds for optimism?

Some industry analysts are more positive. Paul Horsnell from Standard Chartered, for example, expects US oil output to fall by 900,000 barrels next year – enough to clear the current glut given that global demand is rising by roughly one million barrels a day. Saudi Arabia is also convinced that demand will rise to overtake supply next year.

But these are not the views of the majority. Painfully low prices have failed to stop the US shale juggernaut, with producers finding cost efficiencies few thought possible. Meanwhile the Saudi position is interpreted by most analysts as a bearish signal of a stubborn commitment to keeping output high in order to retain market share.

History tells us the tanker can turn around suddenly in the oil market, but at the moment companies are braced for a difficult time ahead.

Could oil price fall to $35, $30 or even $20 a barrel in 2016?

19 November

Increasingly bearish oil traders are predicting another slump in the oil price to $35 a barrel or even lower, as a supply glut continues.

The overnight boost came after the Federal Reserve dampened expectations of a rise in interest rates. That, in turn, prompted a slight fall in the US dollar, making oil cheaper for overseas buyers, and helped prices to rebound from their previous lows.

The rock bottom prices are the result of an ongoing supply glut led by Opec. The Wall Street Journal notes that the US energy watchdog tracked a rise in domestic oil reserves for the eighth consecutive week, while FastFT reports on the latest comments from Saudi Arabia, which appear to commit it to continued high output.

That is not all. Reuters says traders are beginning to speculate what effect a mild winter caused by the El Nino weather phenomenon would have on prices. That could significantly dampen demand for heating and therefore oil.

Another factor that is affecting the market is the potential increase in oil exports from Iran once international sanctions are lifted.

As a result, there has been a "recent steep rise" in the number of derivatives being bought that would pay out if oil falls as low as $35 a barrel by next March. For US benchmark West Texas Intermediate, there has been a doubling of bets on a slump to $30 a barrel. And Goldman Sachs has said a very mild winter could leave oil languishing at "cash prices" of around $20 a barrel.

For producers and companies that are struggling with the current low prices, the hope is that a huge withdrawal of investment by the major oil companies this year will help rebalance the market. Unfortunately for them, there is little currently to support that view.

Is the low oil price good news for the economy?

18 November

The global slump in the oil price over the past year has helped to alleviate concerns over the cost of living – and as wage rises pick up in the UK and US the windfall is giving a boost in real terms to average household incomes.

Direct derivative fuel products have fallen in cost, with petrol in the UK currently only a few pence above £1 a litre. Indirect savings in areas such as food, where lower transportation costs have contributed to persistent deflation, are also being made. These factors have been the primary cause of consumer prices in the UK being negative for the second month in a row for the first time ever in October.

International Brent crude is down at a low of $44.30 a barrel today, following a recent rise prompted by estimates that US stockpiles would fall this week for the first time in more than a month. Amid a worldwide supply glut so severe that oil is currently being stored offshore in tankers, Reuters reports that pressure will remain on prices well into next year.

Consumers will continue to benefit from the drop in oil prices, even if official figures eventually cease to show the effects. But, while individuals may benefit, is all of this actually good news for the western economies?

ABN Amro senior economist Maritza Cabezas has produced a report showing that economists have largely misjudged how cheap oil would affect growth.

First, says MarketWatch, they assumed that consumer spending would rise commensurate with the savings being made at the petrol pump, when instead people were generally using the spare cash to reduce their debts or save. Secondly, economists assumed that the industry would retrench rapidly, but instead (and much to the chagrin of the Opec cartel) even the expensive-to-produce US shale output has only fallen modestly in price while the sector has improved its efficiency.

Cabezas argues that consumer spending would have added only 0.6 per cent to growth, while falling investment would have cost just 0.3 per cent. Some jobs have been lost in the sector, but most have been replaced, she says, by companies in other sectors which have enjoyed a windfall. The overall impact is therefore positive for the economy – "just not as much as previously thought".

Experts concerned about household debt, or climate change, might argue that some of the underlying trends, such as more saving, greater fuel efficiency and the move away from oil dependency to other forms of energy, might have far more positive long-term implications than these figures imply.

Oil price: is Opec really winning the price war?

17 November

It had been widely accepted that a bitter oil production war was being won by the 13-nation Opec cartel, which has flooded the market in a move designed to drive out the upstart US shale industry by keeping prices low.

But that narrative is beginning to be questioned. "Opec has the tell-tale signs of an aging prizefighter. It still technically possesses a knockout punch, but it's unable to land one against younger, more agile opponents, amid doubts as to whether it has the legs to go the distance," says Quartz.

Renewed scrutiny of its strategy to continue pumping at high levels despite a persistent overhang in the market shows that the policy has not caused the slump in US shale output that had been expected. US oil production stood at 9.6 million barrels a day earlier this year, but has not fallen dramatically. It now stands at around 9.1 million barrels and is expected to drop to 8.8 million next year, with four million coming from shale.

As Quartz notes, this is "hardly a death blow".

The cost of Opec's policy has been months of painfully low global oil prices. Reuters notes that Brent crude has been rooted in an unprofitable range below $50 a barrel for longer than it was during the financial crisis, with little prospect of an upsurge. It was trading at below $45 a barrel this morning.

In fact, Bloomberg says Opec's own prices have hit six-year lows. According to an email on Monday from the organisation's secretariat in Vienna, the daily basket price fell to $39.21 a barrel on 13 November. The basket typically trades below international oil futures as some Opec nations pump denser or higher-sulphur crude that's less profitable to refine.

According to IMF figures current prices are below the levels needed to balance the government budgets in most of the Opec member countries. Venezuela and Nigeria in particular are thought to be on the brink of bankruptcy and even Saudi Arabia has been draining its foreign reserves to the lowest level in two years (though they remain plentiful for now).

But there is little sign Opec will change course. In fact, a Saudi official told the Daily Telegraph that the country it still expects oil prices to move towards the $80 a barrel break-even mark, faster than people expect. The official added that the current trough provide Saudi Arabia and other Opec nations with "a window of opportunity to create new prospects for economic diversification".

Oil price being pulled both ways after Paris

16 November

The oil price is being affected by conflicting sentiments today, as the latest global terrorist atrocity raises the prospect of both a hit to supplies and a slump in demand.

As news of the tragedy in Paris broke on Friday, the price of international benchmark Brent crude was below $44 a barrel.

But Daniel Ang, an analyst with Phillip Futures Ltd, told the paper the rally would not be "big".

He said prices, which at below $45 remain near multi-year lows and are loss-making for much global production, would not be hugely influenced by events in Syria as it has not been a significant oil exporter for some time.

He and others argue the market remains substantially oversupplied – and there is even concern that the outcome of the attacks in Paris could be reduced demand for oil, which would weigh further on prices.

Reuters cites an official from the Opec cartel as saying tougher travel controls in the wake of the attack could have a material impact on consumption.

"Certainly any more controls - though it ensures safety of travellers - will reduce transport. Look at what happened after the September 11 attacks," the official said.

Concern over demand could also be affected by the news that Japan's economy is back in recession, which will adds to concerns that slowing global economic growth will reduce oil demand.

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