OIL MARKET 2016: A BALANCING ACT

Saudi Arabia’s new energy minister Khalid Al Falih is in a quandary. On the one hand, still bloated global oil inventories that drove this year’s prices to lows last seen in 2003 concern him. At the same time, the slashing of hundreds and billions of dollars of investment in future projects by the world’s biggest energy companies might be storing up problems.

After dropping below $30 per barrel in January, the price of Brent crude has risen to more than $50, suggesting that not only has the market bottomed, but a sustained recovery is under way after a protracted fall that started almost two years ago. But at what price the market finds balance is flummoxing even one of the most influential figures in the oil industry.

“This is still a discovery process,” Mr Falih said at last week’s meeting of OPEC in Vienna. He hoped prices would “equalize somewhere moderate” to prompt enough investment and supply to meet demand, but not “too much investment to the point that we create an oversupply and a glut again”.

Prices at about $100 a barrel triggered an investment bubble in recent years, supercharging the development of technologies that unlocked the US shale boom.

For Mr Falih, $50 a barrel is unlikely to get the industry lifting capex. “I think the level is going to be higher than,” he said. Investment in oil and gas fell by $160bn in 2015 and could drop by another $50bn this year, according to energy major BP

The conversation in the market is now focused on a re-balancing by the end of the year, as supplies of high-cost oil decline and rising consumption from motorists and other oil users helps take care of excess stocks.

“The market is changing its stance on the potential for a market re-balancing occurring sooner than previously expected,” reports analysts on Wall Street.

Saudi Arabia’s careful diplomacy last week, promising co-operation with other OPEC members, created a united front and damped fears the kingdom was preparing to ramp up production significantly in its battle for market share.

Saudi Arabia’s comments made clear it would not flood the market. Its behavior has been very constructive towards prices,” says Gary Ross, executive chairman at New York Pira Energy.

Unplanned supply outages — from Canada to Nigeria, Venezuela and Libya — have also helped prices double from the January lows. Disruptions averaged around 3.7m barrels a day last month, according to the US Department of Energy. These have more than offset an acceleration in output from Iran and Iraq. Although some outages are short term, as a result of maintenance of fields, fires or strikes, others are longer lasting.

A militant group, has damaged the energy installations of SHELL and Chevron, slashing the country’s output to its lowest level in more than two decades. Despite a push by politicians for dialogue, the militants say they are not open to negotiations.

In the US, crude oil production has declined by more than 900,000 b/d since April 2015 to about 8.7m b/d last month, while petrol consumption was poised to break records this year.

Despite a mixed picture for the global economy, demand for oil has stayed robust and the International Energy Agency could revise upwards its consumption estimates for 2016. A weaker dollar has also helped.

If global oil inventories continue to rise through to next year, any price rise could have limitations. Onshore stockpiles in the USA and China have grown from 4.4bn barrels in March 2015 to more than 4.6bn barrels in the same month this year, according to the IEA.

A combination of large Oil reserve inventories around the World and restoration in supply from Canada and elsewhere, as well as any resurgence from US shale producers amid higher prices, could trigger another fall of price.

Some analysts say consistently higher prices and long lead times are required for shale production to resume. But others insist some fields are already primed and the number of US rigs drilling for oil is on the rise.

Even so, as the oil price hovers around $50 a barrel, analysts believe the odds still favor a further move higher in prices at least on the short term.

There is plenty of oil available to satisfy the large economies for the moment, but at some point certain policy will encourage supply back and what would be the price?

The landscape and psychology of the oil market are changing.