For all the noise about oil’s collapse, the market is saying not that much has really changed: Higher prices will be back soon enough because the current slowdown in demand growth will prove fleeting.
While Brent crude for next month delivery has fallen 25 percent since June to $86.03 a barrel, the price for 2020 contracts is down less than one-fourth that to $91.53.
Today’s prices can’t “be considered the new normal, or at least not yet,” Paul Horsnell, head of commodities research at Standard Chartered Plc in London, said by e-mail yesterday. “The back end of the curve does seem happier above $90.”
Global consumption will grow to 99 million barrels a day in 2019 from 92.8 million this year, according to the Paris-basedInternational Energy Agency. While the U.S. is producing themost oil since 1985 as it taps shale-rock formations and OPEC production grew at the fastest rate in 13 months in September, future demand will require supply from areas with high costs, such as the deep waters of the Gulf of Mexico or the Arctic.
A rebound in prices might happen well before 2020. Brent, the global benchmark, will climb to as much as $100 a barrel next year, according to Sanford C. Bernstein, Standard Chartered Plc and Barclays Plc.
WTI for December delivery rose as much as 41 cents to $81.83 a barrel in electronic trading on theNew York Mercantile Exchange and was at $81.75 at 2:24 p.m. Seoul time. Brent added 44 cents, or 0.5 percent, to $86.47 a barrel on the London-based ICE Futures Europe exchange.
Production Slowdown
Current prices are low enough to slow some drilling for shale oil in the U.S., according to Standard Chartered. Growth from Canada’s oil sands or the Arctic will also be impaired at these levels, Bernstein said. A lack of new sources of supply would eventually drive prices up until exploration becomes profitable again, according to Eugen Weinberg, head of commodities research at Commerzbank AG.
“We don’t see a sustained period of oil below $100 a barrel due to the high marginal cost in some key areas,” Iain Pyle, a London-based oil and gas analyst at Bernstein, said by e-mail Oct. 21. “We’d expect production to be cut back. Investments in future developments will be canceled.”
Brent crude is in a bear market as global demand growth slows while threats to supply in Iraq andLibya recede. Consumption will increase this year at the slowest pace since 2009, the IEA said Oct. 14. Oil for delivery at the end of the decade is now about $5 a barrel more expensive than front-month futures, compared with $18 cheaper in June.
Marginal Costs
Marginal production costs -- the price level needed to make enough new projects profitable to meet future demand -- are responsible for the resilience of later-year Brent prices, according to BNP Paribas.
“The backend remains anchored while the front comes off,” Harry Tchilinguirian, BNP Paribas’s London-based head of commodity markets strategy, said by phone on Oct. 20. “The backend stands around the marginal cost of production and there is no indication why that marginal cost would change.”
Companies have ventured farther and drilled deeper to satisfy rising demand over the past decade, increasing the marginal cost of a barrel to $107 last year from $30 in 2001, according to Bernstein, a consulting firm that studies the financing of individual oil fields globally.
Slower Drilling
The drop in oil prices has led to about 22 projects being canceled this year, principally in Canada and the Arctic, Miswin Mahesh, a commodities analyst at Barclays, said by e-mail yesterday. Total SA said in May it would delay the final investment decision at its Joslyn oil-sands project inAlberta, Canada, because costs were too high. Statoil ASA last month postponed work on its Corner field project in the same province for at least three years.
Oil hasn’t fallen low enough to affect future supplies, according to Jason Kenney, European head of oil and gas equity research at Banco Santander SA. If Brent stays near $85 a barrel into the long-term and West Texas Intermediate, the U.S. benchmark, holds at about $80, oil companieswould still have enough incentive to invest in new projects, he said.
U.S. shale-oil producers don’t have to halt drilling to reduce future output, even a slowdown in activity would have an effect, according to Standard Chartered.
“Production will fall even without shut-ins as the decline rate is enormous on fields of shale after the first two months,” Horsnell said.
Goldman’s View
Goldman Sachs Group Inc. said the slowdown will take time, with Brent hitting a bottom of $80 a barrel in the second quarter of 2015, then rising to $90 in 2016 as U.S. production growth is reduced, according to a research note Oct. 27. The bank cut its 2015 first-quarter and second-half forecasts for Brent and WTI by $15 a barrel to $85 and $75 respectively.
Standard Chartered expects a faster rebound, predicting Brent will average $105 a barrel this year and $115 in 2016. Bernstein forecasts an average Brent price of $104 a barrel next year, rising to $110 in 2016.
“Long-term marginal costs in oil production are well over $100 a barrel,” the Barclays research team including Mahesh said in a note yesterday. “It seems extremely unlikely that oil prices will remain below $100 for very long.
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