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 Oil prices have fallen as much as 20 percent since June, despite a
host of rising supply risks, leading more investors and traders to
consider whether 2015 is the year in which the U.S. shale oil boom
finally tips the world into surplus.
While the plunge has rekindled speculation that the Organization of
the Petroleum Exporting Countries (OPEC) may need to cut output for
the first time in six years when it meets next month, some analysts
are looking much further ahead.
They say a long-anticipated fundamental shift in the market may now
be under way, ending a four-year stretch when $100-plus prices were
the norm, and opening a new era in which OPEC restraint once again
becomes paramount.
The signs are everywhere: U.S. oil imports are shrinking much faster
than expected while oil production climbs to a thirty-year high.
Chinese economic growth, and therefore oil demand growth, is
slowing. Even output in trouble spots like Libya and Iraq is rising
after years of insurrection-led losses.
What is happening in oil markets "finally represent the rebalancing
and the impact of this tremendous surge in U.S. oil production,"
says Daniel Yergin, Vice Chairman of IHS and one of the world's
foremost oil historians.
The fact that oil prices are falling despite continued turmoil in
much of the Middle East and sanctions on Russia "is a milestone, a
marker of change."
Some analysts say it is too early to tell if the latest fall in
prices is any different from previous declines, such as in 2012 and
2013, when events such as civil war in Libya and sanctions on Iran
spurred sharp rebounds.
A spurt in economic growth in Europe or another supply disruption
could again push prices higher in the short term, but risks appear
increasingly skewed lower.
Last week analysts at Credit Suisse cut their 2016 Brent oil price
forecast to $93 a barrel, the second-lowest among analysts polled by
Reuters. The consensus <OILPOLL> for that year was over $101 a
barrel. The bank pegged 2017 at $88 a barrel as North American
output growth "overwhelms" global demand.
Some oil traders agree. Long-dated futures for 2017 and beyond,
which had for months held firm despite the slump in immediate
prices, finally fell last week. Global benchmark Brent crude for
November <LCOc1> fell 5 percent last week, hitting its lowest in
over two years.
The implications of such a shift extend well beyond OPEC. It would
likely accelerate shifts in the global balance of power, with
consumer nations such as the United States becoming less dependent
on producers like Russia or Iran.
END OF AN ERA
For most of the past decade, the oil market has been defined by
shortage. Prior to 2008, years of underinvestment, roaring demand
from Asia and fears of a looming "Peak Oil" fueled the price rally,
and OPEC members have struggled to keep up with demand. Oil soared
to nearly $150 a barrel by mid-2008.
Then, the financial crisis sent prices into a tailspin, forcing OPEC
to make two sharp cuts - as it turns out, its last formal measures
for at least six years. With demand stunted and U.S. shale
breakthrough, the "Peak Oil" theme faded giving way to hope for
abundance.
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Yet oil prices held resolutely above $100 a barrel, with each
potential downturn eventually thwarted. In 2011, it was the
breakdown in OPEC member Libya that fueled gains, cutting supplies
by as much as 1.5 million barrels per day (bpd); later that year and
in 2012, it was U.S. and European sanctions on Iran that choked off
some of supply. Last summer it was Libya again as violence flared
anew. TEST FOR OPEC...AND SHALE PRODUCERS
The same could happen again next year. Growing tensions with Russia
are putting supplies from the world's No. 2 producer at risk. Talks
with Iran over a nuclear deal could sour, prompting calls to ratchet
up sanctions. Yet the odds for another rebound are growing longer.
"The fire drill may be real this time," says Daniel Sternoff at
Medley Global Advisors.
Now, either OPEC agrees to put a floor under prices in the
short-term, or a prolonged period of lower prices starts to curb
long-term investment or revive demand growth, he says.
The price downturn is not only testing OPEC's resolve but also the
durability of the U.S. shale revolution, which has added 1 million
bpd to U.S. output in each of the past 3 years. It is far from
clear when, or whether, OPEC will intervene. Sharp cuts in Saudi
Arabia's oil sale price to Asian customers on Wednesday suggested
that the world's largest oil producer will accept lower prices to
maintain market share.
Bob McNally, a White House adviser to former President George W.
Bush and now president of the Rapidan Group energy consultancy, said
after a recent trip to Saudi Arabia that OPEC producers might wait
for U.S. output cuts rather than cut production themselves. While
some in OPEC are starting to call for cuts, core Gulf members are
betting winter demand will revive the market.
That may change if oil prices slide another $10 or so. Not only will
that squeeze budgets from Caracas to Moscow, but U.S. drillers would
probably curb activity in the event of a "sustained pullback" below
$80 a barrel, analysts at Baird Energy wrote in a report on Monday.
"US shale oil after all is not just the newest and biggest source of
supply, but also high cost and most responsive to oil prices," said
McNally. "North Dakota and Texas have effectively joined OPEC,
though they may not have realized it yet."
(Editing by Jonathan Leff and Tomasz Janowski)
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