Since oil prices fell out of their trading range of around $100 a barrel last year, “lower for longer” has been the catchphrase in the market: demand growth has slowed and the market is oversupplied. But now it looks as though oil could stay “lower for even longer”. US crude futures touched an 11-year low of $40 a barrel last week. Brent, in the low $40s, remains close to the six-year low seen in August.
“The latest blow was pronouncements from opposing sides of the market,” says Spencer Jakab in The Wall Street Journal – both of which suggested that the supply surplus is set to grow even further. Opec, the oil exporters’ cartel, said that excess inventory in developed nations has exceeded levels seen in the first quarter of 2009, which was the worst period of the global recession. Stockpiles are 210 million barrels higher than their five-year average.
Meanwhile, according to the International Energy Agency (IEA), total developed-world oil inventories have hit a new record of almost three billion barrels in total – more than a month’s worth of global consumption. “There’s a sizeable risk” that oil reserves will exceed storage capacity, says DNB ASA’s Torbjoern Kjus. The upshot, says the IEA, is that oil might not return to $80 before 2020.
Behind the numbers
Demand has been solid this year. Thanks in part to cheaper prices, it is expected to climb by almost two million barrels a day, the fastest pace in five years. But the bigger picture is that longer-term demand growth is slowing as China shifts to a more consumer-orientated economy, implying lower energy consumption following along period of infrastructure investment.
“We are approaching the end of the single largest demand growth story in energy history,” as the IEA’s Fatih Birol puts it. Increasing energy efficiency and progress with renewables are also tempering the world’s appetite for oil.
On the supply side, the glut could grow even bigger as sanctions on Iran ease and more of its oil reaches the global market. Meanwhile, Russian, Iraqi and Saudi Arabian production has hit record levels as Saudi-led Opec tries to keep prices low to put US shale producers out of business.
What next for Saudi Arabia?
But Opec faces a “hard slog’, says Ambrose Evans-Pritchard in The Daily Telegraph. The US shale sector has been far more resilient than expected. At 9.1 million barrels a day, production is pretty much where it was a year ago, when the price war began. The US government expects output to fall by 600,000 barrels a day next year – “not a collapse”. The Saudis may have miscalculated. The cost of shale technology is falling and drillers have become more productive, so they can survive at lower oil prices than once assumed.
And while some will go bust, their infrastructure and technology will remain in place – so bigger firms can pick up the pieces and boost production as soon as prices tick up. Opec may face “a permanent headwind” whereby any rebound in prices is capped by higher US production.
In which case, it will be in trouble, as Evans-Pritchard points out. Annual revenues have halved to around $550bn, causing severe pain in smaller countries that need high oil prices to balance their budgets. Even Saudi Arabia itself has been forced to borrow money on global markets to compensate for dwindling reserves. How much longer can it afford to prop up regional allies? “It would be a macabre irony if Saudi Arabia’s high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard.” That would certainly clear the oil glut.