Baku, Azerbaijan, Nov. 13
Trend:
There's not much of an uptick foreseeable for oil prices in the short term due to Opec's desire to gain market share at the expense of price, the International Energy Agency said in its new World Energy Outlook for 2015 and beyond.
But the dramatic cut in investments witnessed these past 12 months will eventually support a return to an oil price of $80/barrel by 2020 and higher in the period beyond. The IEA also warned the market about becoming complacent about the current overhang of supply as it by no means guarantees longer-term oil market security.
"The process of adjustment in the oil market is rarely a smooth one, but, in our central scenario, the market rebalances at $80/b in 2020, with further increases in price thereafter,"the IEA said. But it added: "A more prolonged period of lower oil prices cannot be ruled out."
Key conclusions:
• The many months' plunge in oil prices has set in motion forces that eventually will lead to a rebalancing of the market through higher demand and lower growth in supply.
• Oil and gas companies need to invest more than $600 billion annually just to maintain production at current levels. This is needed to compensate for declining production at existing fields.
• Annual growth in demand up to 2020 will slow to 900,000 barrels/day, with most of the growth coming from India, China and the Middle East.
• The re-balancing of the market has already begun, with non-Opec production slowing. That slowdown is apparent not least among US shale oil producers many of which are struggling at current prices below $60/b.
• US shale oil producers will see a further slowdown in production over the coming months before bouncing back as prices recover. The 20% cut in upstream investments will eventually leave plenty of room for shale oil producers given their short investment cycle and ability to react to a changing price environment.
• The IEA highlights the risk that oil prices could stay lower for longer on assumptions of Opec market-share battle, resilient shale producers and slowing growth. But the strains that low prices put on the fiscal balances of key Opec producers should ensure that this scenario is unlikely to extend far into the future.
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The EIA basically highlights that the best cure for a low price is a low price as it creates an environment which eventually forces the market to re-balance itself.
Dreaded contango
With the potential for a doubling of oil prices in four years, why are we not seeing a stampede into oil futures? The explanation for this is the dreaded contango which creates a very challenging environment from an investment perspective.
The accumulated cost of rolling an oil position, either directly through futures or indirectly through an investment in exchange-traded products rises when a market is oversupplied. At the moment the cost of rolling December WTI crude futures into January has risen to $1.25 or the equivalent of 2.8%. This is the highest in six months, and it shows that the near-term outlook —where US inventories continue to rise and production stays robust — remains very challenging.
Ole Hansen, Head of Commodity Strategy / Saxo Bank
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