The top of the oil market may be closer than you believe.
With Brent futures having bounced back up to $41 a barrel, the International Energy Agency sees “light after the tunnel,” and Goldman Sachs Group Inc. is spotting “green shoots.” Even so, many analysts warn that, such as the failed rally this past year, this recovery will sputter once prices go high enough to keep U.S. crude flowing.
“If prices keep going up, U.S. production from shale producers is incredibly responsive,” Jamie Webster, vice-president of crude markets at IHS Energy, said inside a Bloomberg Television interview. “Falling U.S. production is the key dynamic you need to get supply to equal demand, and that might not actually happen,” meaning prices could fall again.
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Brent futures have recovered about 40 per cent from the 12-year low of US$27.10 reached in January, trading for US$38.59 at 4:34 p.m. Tuesday working in london. With output away from Organization of Petroleum Exporting Countries set for its biggest slump since 1992, “prices may have bottomed out,” based on the IEA. Yet world crude benchmarks may struggle to push past US$50 a barrel this year as any further price recovery only delays the production cuts needed to balance the marketplace, according to the median of a Bloomberg survey of nine analysts.
While U.S. crude production has retreated 5.5 percent since last summer, the entire process of depleting bloated inventories is just starting out, based on Goldman Sachs. The financial institution, which foresaw oil’s plunge in to the US$20s, predicts prices still need to stay low enough to starve producers of capital, otherwise the output losses essential to take away the supply surplus won’t happen.
“An earlier rally in prices before a deficit materializes would prove self-defeating,” Jeffrey Currie, head of commodities research at Goldman Sachs in Ny, said in a report on March 11.
The recovery “could throw a lifeline to U.S. producers” that will “limit oil production declines,” said Giovanni Staunovo, an analyst at UBS Group AG in Zurich.
Sustainable price
The argument that $50 represents a ceiling for crude is flawed, according to Sanford C. Bernstein & Co., which sees prices returning to US$70 in the next year. The industry can’t stay profitable at current prices, having lost US$3 for each barrel produced last year even while companies squeezed costs, it said.
“The price of oil needs to rise to balance the market in the medium run, and also the medium run may be sooner than people think,” analysts including Bob Brackett in New York said inside a report.
The rally could regardless sputter out before it even reaches the point that revives U.S. production, according to UBS’s Staunovo. Temporary price support from pipeline disruptions in Iraq will fade, while talks between OPEC and non-members on freezing supply will have little impact, he said. Iran still insists it won’t accept any freeze until it restores about 1 million barrels of exports now that sanctions happen to be lifted, Russian Energy Minister Alexander Novak said Monday carrying out a meeting in Tehran.
Similar trend
This year’s price trend is nonetheless much like last year, IHS’s Webster said. West Texas Intermediate crude climbed 40 percent from late March 2015 as U.S. drilling plummeted, yet stalled near US$61 that summer because the nation’s production kept going. The U.S. benchmark ultimately sank near US$40 again by August.
The resilience of U.S. production has had OPEC by surprise, Secretary-General Abdalla El-Badri said last month. Break-even prices at United states shale wells declined by 40 percent between 2013 and 2015, according to consultant Rystad Energy AS. Crude output remains near 9 million barrels each day even as data from Baker Hughes Inc. shows drillers are utilizing the fewest rigs since 2009.
The decrease in costs makes OPEC’s forecast for a 700,000 barrel-a-day contraction in non-OPEC output this year “more uncertain,” the audience said in its monthly oil-market report Monday.
You’ve got frackers available whose ability to come into the marketplace is extremely, very flexible
As a direct result efficiency gains, the “shale band” – the price range that enables output to be profitable – has fallen by about US$10 since this past year to US$45-$55 a barrel, said Olivier Jakob, managing director at consultant Petromatrix GmbH, who originated the term. This year’s rally has buoyed U.S. drillers, who raised US$10 billion of extra funds on Wall Street.
There’s a cache of suspended wells stretching from south Texas to the Rocky Mountains that may be completed when prices rise high enough, based on analysts at Bloomberg Intelligence. This reserve is called the “fracklog,” in reference to the technique of hydraulic fracturing, or fracking, utilized by the shale industry.
“There’s a cap that has got to use when the high-cost frackers is in, at say US$50,” Catherine Mann, chief economist at the Organization of Economic Cooperation and Development, said inside a Bloomberg Television interview. “You’ve got frackers available whose capacity to enter into the market is extremely, very flexible. So there’s a range now.”
Bloomberg News
