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North Slope crude heads for $80
Rising demand, tensions over sanctions on Iran, collapsing Venezuela production all combine to put upward pressure on the price Alan Bailey Petroleum News
The price of crude oil has been continuing to climb in recent weeks, with Alaska North Slope crude reaching $79.81 per barrel on May 21, just a few cents shy of $80. This is the highest price seen since November 2014, a few months after the price started to crash below the $100 level.
The general view is that robust oil demand coupled with supply concerns, particularly in connection with the specter of renewed sanctions against Iran, is driving the price up. The continuing collapse of Venezuelan oil production is adding to the upward pressure on the price. In parallel with oil demand moving ahead of supply, the stockpiles of crude oil have been falling.
As always, the fascinating but somewhat unanswerable question is where does the oil price go from here?
Many issues at play According to a report in Bloomberg, Morgan Stanley has suggested that new regulations that have come into effect, forcing ships to use lower sulfur fuels, will drive a demand for fuels such as diesel and marine gasoil, triggering a higher demand for crude oil and perhaps pushing the oil price towards $90. On the other hand, the geopolitical factors behind oil market angst are inherently unpredictable. And there is the question of the price target that the Organization of the Petroleum Exporting Countries may maintain as a basis for its quotas on oil production, quotas that have been a significant factor in the oil price rise. And will Russia remain in step with the OPEC oil quota strategy?
US shale oil One prominent theory that has gained traction in recent years is the idea that U.S. shale oil production can act as a price setter in the global oil market: Unlike production from conventional oil fields, which are slow to develop and require maximum output once in operation, shale oil production can more easily be ramped up and down in response to price signals.
BP Group Executive Bob Dudley has notably espoused this concept: In 2015 he coined the phrase “lower for longer” to characterize the oil price situation. And in a recent interview with Reuters Dudley re-iterated that outlook, commenting that he sees the current oil price rally cooling off to around $50 to $65, because of surging shale oil output. Dudley also suggested that a price above $80 would impact oil demand growth.
The more bullish view A recent article in the Financial Times took a different perspective, suggesting that the “lower for longer” syndrome is now dead. This article suggested that, in reality, U.S. shale oil production has been unable to adequately respond to rising oil demand, with the result that oil inventories have fallen. The article also points out that Brent futures are now trading above $60 as far ahead as December 2024. In the nearer term, Brent futures are currently trading in the high $60s to low $70s through to April of next year.
North Slope crude tends to track quite close to the Brent price.
Some commentators have also said that an underinvestment in oil development during the recent period of exceptionally low oil prices is now starting to feed through to a shortage of production capacity to meet growing oil demand.
IEA’s May report The International Energy Agency, in its May report on the global oil market, said that it had slightly revised its outlook for 2018 oil demand growth from 1.5 million to 1.4 million barrels of oil per day, because of rising oil prices. The agency now anticipates total worldwide demand to average 99.2 million barrels per day in 2018.
In April, global oil supplies held steady at around 98 million barrels per day, with strong non-OPEC production offsetting a drop in OPEC output, the IEA said. Production from the United States in particular pushed up the non-OPEC output, while production declines in Venezuela and Africa reduced the OPEC delivery.
Tightening market The IEA commented that it is still too early to determine the impact on the oil market of the U.S. withdrawal from the Iran nuclear agreement, although to some extent the effect of the U.S. decision has already been factored into the oil price. At the same time, the oil market has been continuing to tighten, as demand exceeds supply and stocks drop. And, given the International Monetary Fund’s recent bullish outlook on the global economy, the IEA remains confident that oil demand growth will remain strong. However, at some point the sharp rise in the oil price will dampen that growth, the agency thinks.
On the supply side of the market, rising U.S. oil production will somewhat compensate for lower production elsewhere. The IEA anticipates a modest increase in U.S. output in 2018, bearing in mind the current logistical constraints in transporting U.S. shale oil to market. Projects are underway to alleviate those transportation problems.
Although there has been much focus on declining oil stocks in the developed world, the IEA sees attention shifting more towards the rapidly changing geopolitical situation, with oil producers and consumers trying to figure out how dampen volatility in the oil market.
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