Oil: lower for even longer

Since oil prices fell out of their trading range of around $100 a barrel last year, “lower for longer” has been the catchphrase in the market, says Andrew Van Sickle.

769-Rig-634

Opec now faces a "permanent headwind"

Since oil prices fell out of their trading range of around $100 a barrel last year, "lower for longer" has been the catchphrase in the market: demand growth has slowed and the market is oversupplied. But now it looks as though oil could stay "lower for even longer". US crude futures touched an 11-year low of $40 a barrel last week. Brent, in the low $40s, remains close to the six-year low seen in August.

"The latest blow was pronouncements from opposing sides of the market," says Spencer Jakab in The Wall Street Journal both of which suggested that the supply surplus is set to grow even further. Opec, the oil exporters' cartel, said that excess inventory in developed nations has exceeded levels seen in the first quarter of 2009, which was the worst period of the global recession. Stockpiles are 210 million barrels higher than their five-year average.

Meanwhile, according to the International Energy Agency (IEA), total developed-world oil inventories have hit a new record of almost three billion barrels in total more than a month's worth of global consumption. "There's a sizeable risk" that oil reserves will exceed storage capacity, says DNB ASA's Torbjoern Kjus. The upshot, says the IEA, is that oil might not return to $80 before 2020.

Behind the numbers

"We are approaching the end of thesingle largest demand growth story in energy history," as the IEA's Fatih Birol puts it. Increasing energy efficiency and progress with renewables are also tempering the world's appetite for oil.

On the supply side, the glut could grow even bigger as sanctions on Iran ease and more of its oil reaches the global market. Meanwhile, Russian, Iraqi and Saudi Arabian production has hit record levels as Saudi-led Opec tries to keep prices low to put US shale producers out of business.

What next for Saudi Arabia?

And while some will go bust, their infrastructure and technology will remain in place so bigger firms can pick up the pieces and boost production as soon as prices tick up. Opec may face "a permanent headwind" whereby any rebound in prices is capped by higherUS production.

In which case, it will be in trouble, as Evans-Pritchard points out. Annual revenues have halved to around $550bn, causing severe pain in smaller countries that need high oil prices to balance their budgets. Even Saudi Arabia itself has been forced to borrow money on global markets to compensate for dwindling reserves. How much longer can it afford to prop up regional allies? "It would be a macabre irony if Saudi Arabia's high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard." That would certainly clear the oil glut.

Recommended

The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021
Uranium price is melting up
Commodities

Uranium price is melting up

The price of uranium has hit an eight-year high after being in the doldrums for much of the past decade
17 Sep 2021
Why are energy prices going up so much?
Energy

Why are energy prices going up so much?

UK energy prices are going through the roof, with electricity the most expensive in Europe and gas at its highest for 13 years. Saloni Sardana explain…
16 Sep 2021
The charts that matter: gold and bitcoin both slide
Global Economy

The charts that matter: gold and bitcoin both slide

Gold and its modern counterpart, bitcoin, both sold off this week. Here’s what’s happened to the charts that matter most to the global economy.
11 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021