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

Oil price hits two-month low after supply surge

02 July

Oil prices fell to a two-month low yesterday after a spike in US production boosted stocks reigniting concerns that the market is oversupplied.

The Wall Street Journal reports benchmark Brent Crude futures fell 2.5 per cent to $62.01 a barrel. This equals the level reached on Monday, which marked the low watermark over the previous 30 trading days according to Reuters.

The decline was more intense for the US benchmark price on the New York Mercantile Exchange, which recorded the biggest single-day loss since 8 April of 4.3 per cent to $56.96, its lowest level in two months.

Downward pressure came in the wake of data showing oil inventory levels had risen for the first time in nine weeks following a spike in oil production across the US. On Tuesday the Energy Information Administration reported that the country's producers had picked up output to its fastest pace since 1971.

While the news undermines optimism that oil prices might be recovering as increasing demand eats into stockpiles, Brent crude has in fact remained within a fairly narrow range of around $4.50 in recent weeks as traders weigh conflicting evidence on supply. Oil prices have already recovered ground in early trading today, up 29 cents a barrel.

Predictions as to where prices will go by the end of the year are mixed, with more speculative investors betting on a price of around $80 and others forecasting prices will move up only slighting and remain between $65 and $70.

The industry expects the price over next five years to average $70. Last week the Scottish government revealed this would reduce its expected tax-take from North Sea oil revenues by around 80 per cent.

Oil price slump leads Scotland to slash tax forecast by 80% 

26 June

Revenue flowing to Scotland from North Sea oil fields is expected to be dramatically lower than previously estimated due to the slump in the oil price over the past year. The central forecast in a new Scottish government report predicts a decline in tax receipts of more than 80 per cent.

The latest official figures suggest revenues could be as low as £2.4bn over the coming five years with between £500m and £700m raised annually. These could rise to a cumulative total of £10.8bn in a best case scenario, the report says, assuming there are a range of productivity improvements and a recovery in the oil price to an average of $100 a barrel next year. Benchmark Brent crude is currently hovering around $63 a barrel, with forecasts suggesting a price at year's end of between $65 and $80.

If a central forecast assuming an average oil price of $70 per barrel proves accurate and production increases in line with the estimate of industry body Oil and Gas UK, the Scottish government stands to earn £4.4bn for the five years to 2020. This compares with expected revenues of £24bn under the same forecast published last year, representing a fall of 81 per cent.

Earlier this month, Deirdre Michie, the new boss of Oil and Gas UK, told a conference in Aberdeen the sector faces a future in which long term oil prices are about $60 a barrel. Michie said that to be sustainable at this level, the industry would have to focus on "efficiencies", The BBC reports.

 Some analysts criticised the timing of the report, which is typically released in March but this year was published on the final day before the parliamentary recess, The Guardian notes. Labour finance spokesperson Jackie Baillie, quoted in The Scotsman, said that it was "ridiculous that the SNP tried to sneak this report out on the last day of parliament". She accused the Government of putting "their own political interests ahead of industry concerns".

Oil price: Iran talks raise prospect of fresh pressure

25 June

Executives from two of Europe's biggest oil and gas companies confirmed they have held talks with senior officials in Iran to weigh up potential opportunities in the event of the oil-rich country reaching a nuclear deal with the west.

If the nuclear deal goes through and economic sanctions on Tehran are lifted, the oil price could see renewed downward pressure next year, analysts say.

Representatives from Royal Dutch Shell and Italian peer ENI flew to the Iranian capital in May and June to discuss the possibility of investing in Iran's energy industry, the Financial Times reports. Both firms confirmed the talks had taken place, centred on debt owed to the National Iranian Oil Company dating from before sanctions came into force as well as possible areas for future investment.

Confirming the talks to the Daily Telegraph, a spokesman for Shell said the discussions included "potential areas of business cooperation should sanctions be lifted". Iran is understood to be sweetening the terms of their contracts to encourage international investors to help develop the country's oil fields, which were producing five million barrels of oil a day before the Islamic revolution in the 1970s but are now producing around half that amount, the Telegraph reports.

US Energy Information Administration figures quoted by the FT show oil exports from Iran fell from 2.6 million barrels a day before sanctions were imposed in 2011 to around 1.4 million today. If this increased in the event of sanctions being lifted, the organisation said the price of oil could fall by $5 to $15 per barrel next year.  

According to the Wall Street Journal, Benchmark Brent crude ended yesterday down 1.5 per cent to $63.49 a barrel, as concerns over supply persisted despite a report suggesting demand was up. Earlier this week reports revealed forecasts that the price would rise by the end of this year, with analyst estimates ranging from $65 to $81 a barrel.


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