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 Some are now reconsidering that view, as long-term oil prices take
the lead in the market's latest dive, swaying sentiment toward a
lengthier slump that would mean prolonged pain for big producers,
from Exxon Mobil Corp to Saudi Arabia.
While immediate delivery benchmark global Brent crude oil futures at
$50 a barrel are still about $4 higher than they were at their
lowest point in January, prices for delivery in December 2020 are
nearly $8 lower than the start of this year, trading at a contract
low of less than $67 on Tuesday. A year ago the contract hovered at
around $100 a barrel.
The reason for the deterioration of the forward curve and decline in
"long-dated" futures is a subject of debate.
But even some who disagree with the fundamental logic of lower
long-dated prices are coming round to the scenario that prices will
be lower for longer.
"The back of the market has led prices lower as speculators are no
longer convinced higher oil prices are required to balance future
oil supply and demand," consultants PIRA Energy Group, which called
last year's price slide but has also predicted a sharp rebound,
wrote in a note this week.
The firm does not make its specific forecasts public.
"PIRA disagrees with this view, but a 'show me' mindset regarding
tightening balances will keep prices lower than forecast earlier."
Some believe the recent selloff was fueled by speculators fleeing
the market amid collapsing confidence after China's stock market
crash, and exacerbated by a lack of liquidity and resumption of
hedging by producers including Mexico, which sell futures to guard
against lower prices.
"The decline in calendar year 2016 prices has been
overstated, in our view," analysts at Barclays wrote this week.
"Fundamental tightening, demand and stock revisions, and current
positioning are likely to raise prices in the months ahead."
Others say it stems from more deeply rooted fundamental factors,
such as falling production costs in the U.S. shale patch and
expectations of rising exports from Iran next year following a
landmark nuclear agreement - and if so, far forward prices may be
flashing warning lights for the future.
A NEW EQUILIBRIUM?
The retreat in long-term oil prices commenced in the latter part of
last year, when Saudi Arabia made clear it would no longer cut
production in order to tighten up sloppy markets.
Absent the kingdom's implicit promise to defend prices, the value of
Brent crude oil for five years in the future slid from nearly $90 a
barrel in late November to around $72 almost two months later.
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Over the past month, however, it has dived anew, reaching nearly $66
a barrel on Tuesday, its lowest since 2009.
Last week, analysts at ABN AMRO cut its 2016 oil price forecasts by
$10 a barrel on a mix of factors including falling production costs,
disappointing demand, a stronger U.S. dollar and deteriorating
market sentiment.
"What we see is that the U-shape recovery which we still expect for
oil prices will take longer to materialize," Senior Energy Economist
Hans van Cleef told the Reuters Global Oil Forum last week.
The question for oil executives, traders and analysts is whether
this represents a new equilibrium for the market - a price high
enough to encourage just enough new production in the future to meet
demand, which continues to grow.
Standard Chartered's Paul Horsnell, one of the most bullish
forecasters in Reuters monthly poll with a projection for $93 Brent
in 2017, says no - long-dated prices are too low, although the
latest slide may signal a deferred recovery.
"Is this a market transitioning from a view of an inevitable bounce
in 2016 to adding another year onto the rebound? We just don't know
yet," said Horsnell.
And while some big companies such as BP Plc and Royal Dutch Shell
Plc are preparing investors for a more extended downturn, some are
still signaling cautious optimism.
U.S.-focused Anadarko Petroleum Corp, for instance, is opting not to
pursue an "aggressive" approach to completing shale wells that have
been drilled but not yet hydraulically fractured.
Completing wells more quickly is "an option we might choose to
pursue if we thought the current environment was going to be
protracted and we were somehow in a new normal, $50-esque oil
environment," Chief Financial Officer Bob Gwin told analysts last
week.
"We don't believe that's true over the intermediate to longer term."
(Reporting by Jonathan Leff; Editing by Lisa Shumaker)
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