Bull market for crude?
Price has risen, but unclear if trend can be maintained as exploration picks up
With a recent upward trend in oil prices being designated as an oil bull market, are prices set to rise to levels more comfortable for the wellbeing of the Alaska oil industry? At a peak of $58.43 on Sept. 25, the price of Brent Crude reached a two-year high as oil demand climbed. But the price dropped back a little to $55.72 on Oct. 4. West Texas Intermediate peaked at $52.22 on Sept. 25 and subsequently fell to $49.55. According to data published by the Alaska Department of Revenue, the price of North Slope crude has been tracking at slightly below that of Brent.
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Excess supplyThe general consensus regarding the extended regime of relatively low oil prices in recent years is that the price is being depressed by an excess of supply over demand, rather than by low demand: Hence the lengthy period over which oil prices have remained low. A critical factor appears to be the growth of shale oil development in North America. While shale oil has driven a major boost to U.S. oil production, the technology involved in shale oil development allows production to be ramped up and down quite quickly in response to oil price signals.
In 2015 Bob Dudley, group chief executive of BP, coined the phrase “lower for longer” to characterize the oil price situation. Dudley opined that the oil industry should plan for an extended period of depressed price levels, rather than anticipate a sudden rebound in expectation that increasing demand will soon overtake depressed oil development. At the time when Dudley made his remarks, Brent crude was trading at near $63 per barrel, a price level above that of the recent peak.
Recent oil price moves have seen analysts commenting on their perceptions of the current oil market. On Sept. 26 Bloomberg reported that commodity trading company Trafigura had suggested that the “lower for longer” era may be nearing its end, because of supply constraints as conventional oil production declines and shale oil productivity in the Permian basin peaks. And on Sept. 29 the Financial Times reported that soaring oil demand had pushed up the oil price - the newspaper had reported the day before that, because of a tightening oil market, spot oil prices had moved above futures prices, a phenomenon rarely seen in the past two years. However, the Financial Times also reported skepticism regarding whether oil prices would move any higher.
Price fluctuationsIt may be instructive to look at recent oil price fluctuations, to examine the recent price peak in a broader context. The sharp rise in price began in mid-July but followed an almost equally sharp drop. Over the past 12 months the Brent price has followed a slight upward trend, albeit with major variations, down and back up again, along the way. The recent peak in the West Texas Intermediate price, on the other hand, is slightly below something of a price plateau between January and March of this year - following that plateau, the price tumbled before climbing back in the recent price recovery. Looking further back, that recent peak seems to take on more of the character of another gyration in a continuing quite volatile price situation.
Trying to project these oil price trends and gyrations into the future is a dangerous pastime, given the many variables and geopolitical issues that impact the oil market. The recent referendum for independence in Iraqi Kurdistan, for example, sent jitters through the oil market because of the possibility of Turkey blocking oil exports from the region in response to the specter of Kurdish autonomy. And recent problems with oil supplies from Libya and Nigeria have been reported.
Meanwhile, in Alaska as elsewhere, oil companies have been pushing down their cost profiles, to enable viability in the current price environment. No one seems to be betting on a major upward hike in the price of oil in the immediate future.
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