Oil storage tanks stand in Cushing, Okla., in March, 2015. Senior oil traders and executives expect crude to remain between $40 (U.S.) and $60 a barrel over the next 12 months.Daniel Acker/Bloomberg
The largest oil traders are anticipating little relief to what has become the worst market slump in a generation.
All but one of 15 senior oil traders and executives interviewed this week at the annual Asia-Pacific Petroleum Conference in Singapore expect crude to remain between $40 (U.S.) and $60 a barrel over the next 12 months. Brent crude has traded in that range for the past five months.
Oil and natural gas companies have cut more than 350,000 jobs since crude prices started to fall in 2014 as explorers slashed hundreds of billions of dollars in investment to weather the rout. While crude has climbed from the 12-year lows reached at the start of 2016, a supply glut caused by the U.S. shale boom is pinning prices at half the levels of two years ago.
"The issue is that once prices go up too fast, American drillers start to produce more," Arzu Azimov, head of Socar Trading SA, said. "The market will stay in the corridor of $40 to $50, max $55."
The majority of oil traders said market rebalancing has been pushed back by at least six months from their projections in early 2016 because of higher-than-expected production from Iran and Saudi Arabia, coupled with the resilience of U.S. shale output.
Inventories loom
"The oil market isn't yet balanced," said Saad Rahim, chief economist at oil trading house Trafigura Group Pte. "The market has yet to start working through millions of barrels of inventories accumulated during the downturn."
The bearish tone at Asia's top energy conference reflects skepticism that OPEC countries and other producers can agree to cap output and shrink a global glut when they meet for talks later this month in Algiers.
While oil prices have jumped more than 10 per cent since early August amid speculation that Saudi Arabia and Russia can marshal a production freeze, their actions point in a different direction. Riyadh is pumping the most crude on record, while Russian oil output climbed above 11 million barrels a day for the first time since at least 1991, according to data published on the website of the Russian Energy Ministry's CDU-TEK unit for start of September.
Oil prices are likely to stay around current levels "for the next two years," said Christoph Ruehl, chief economist at the $800-billion Abu Dhabi Investment Authority. Abu Dhabi produces most of the oil in the United Arab Emirates, the fourth-ranked OPEC producer.
Credibility issue
"Prices may well be capped around current levels for another year, rather than rising gradually through 2017," said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd.
Brent for November settlement climbed $1.65, or 3.4 per cent, to $49.63 a barrel in London Thursday, below the most recent peak of $52.86 set in June. Brent hit a 12-year low of $27.10 a barrel in January.
Freezing output would have a limited impact on prices with the biggest producers pumping at close to record levels. Higher prices over the coming months would require production cuts to change supply and demand balances. The Organization of Petroleum Exporting Countries could also lose credibility with too much talk and no action.
"There's a risk of crying wolf," David Fyfe, head of market analysis at oil trader Gunvor Group Ltd., told the conference in Singapore.
Price risk
Traders said the risk of a significant decline in prices is limited as the gap between supply and demand narrows. Global oil markets will continue to rebalance this year as a pickup in demand from refiners absorbs record output from several Persian Gulf producers, the International Energy Agency predicted last month.
"In general, we believe we are getting closer to balance," Eiong Tan, head of crude trading in Asia at BP PLC, said in an interview. "Consumption is catching up with supply."
Even when the market moves into a deficit, it will have to work through millions of barrels accumulated as inventories since 2014. Keisuke Sadamori, director of energy markets and security at the International Energy Agency, told conference delegates that petroleum stocks haven't substantially declined yet.
The "huge" stockpile accumulated over the past two years, "will serve as a lid on prices in the near future," he said.
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Drop in oil inventories pushes prices higher
Energy explorers, offshore rig owners and shale drillers surged more than any other industry on the S&P 500 index on Thursday after a surprise plunge in U.S. crude inventories that pushed oil prices higher.
West Texas intermediate for October delivery rose $2.12 (U.S.), or 4.7 per cent, to $47.62 a barrel on the New York Mercantile Exchange.
Diamond Offshore Drilling Inc., Murphy Oil Corp., Marathon Oil Corp. and Apache Corp. all jumped more than 7 per cent on Thursday, coaxing the S&P 500 energy index to its biggest intraday gain since July 12. Other significant moves were posted by Noble Energy Inc., Transocean Ltd. and Cabot Oil & Gas Inc.
Crude held in U.S. storage tanks declined by 14.5 million barrels last week, the biggest seven-day drop since 1999, the Energy Information Administration said on Thursday. Analysts had expected inventories to grow rather than shrink. The average estimate in a Bloomberg survey was for a 905,000-barrel gain.
Tropical Storm Hermine moved into the Gulf of Mexico on Aug. 28, disrupting shipping and output before moving northeast. Imports tumbled 1.85 million barrels. "The huge number is clearly a result of storm activity in the Gulf," said Michael Lynch, president of Strategic Energy & Economic Research.