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 Oil has more than halved in value over the last year, thanks to huge
oversupply, and many oil companies, particularly in the United
States, say they may soon have to rein in production, tightening
supply, unless the market recovers.
That has led many analysts to predict that oil - on average around 5
percent of companies' costs - will see price rises later this year
or in 2016, pushing up inflation.
But oil derivatives tell another story.
Contracts for delivery of crude oil in the future on the big
commodities markets such as the New York Mercantile Exchange and the
InterContinental Exchange show the price of oil in five years' time
has collapsed in recent months.
U.S. crude now costs around $42 a barrel for delivery next month,
and only about $20 more for delivery in 2020.
Prices of oil for future delivery are usually much more stable than
volatile near-term prices, holding their value even when the spot
market crashes.
But the recent oil-price rout looks different.
Prices for all futures months for years to come, also known as the
futures price "curve", have come down sharply.
"The curve is saying prices will stay low for some time," said
Amrita Sen, oil analyst at consultancy Energy Aspects.
Futures prices are not forecasts, not least because liquidity tends
to be low for long-term forward contracts.
But they are good indicators of sentiment because they are a market
where speculators bet on forward prices, and also allow large
producers and consumers to hedge future business.
Analysts say the futures curve is saying the current collapse in oil
prices will be sustained because it has been driven by massive
oversupply that is likely to persist.
Oil prices have collapsed over the last year as Saudi Arabia and
other members of the Organization of the Petroleum Exporting
Countries have increased production to try to protect market share
from competitors such as U.S. shale oil drillers.
"NO RECOVERY"
The global crude oil benchmark, North Sea Brent, fell to almost $45
a barrel in January from above $115 six months earlier. Prices then
rallied but have since plunged towards lows not seen since the
financial crisis and long recession that started in 2008/9.
U.S. oil production has risen by more than 4 million barrels per day
(bpd) over the last five years, thanks to new shale extraction
techniques such as "fracking", eroding OPEC's sales.
World oil production is now around 3 million bpd higher than demand,
filling oil storage tanks from Houston to Huangdao.
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And as prices have fallen, many oil producers have hedged their
future oil production using derivatives, selling futures contracts
for oil that will be pumped in 2016, 2017 and beyond.
This has helped pull down forward prices as nearby spot prices have
collapsed, dragging the whole futures curve lower.
In 2008/9, forward futures held up fairly well. Contracts for U.S.
crude oil five years ahead traded as much as $30 above prompt
prices, keeping the futures curve in a steep downward slope known as
a "contango".
Now that slope is much less steep, with the five-year futures spread
under $20.
"There is an imbalance today compared to 2008. We have 3 million bpd
more producer hedging from shale guys," said Sen at Energy Aspects.
"That will necessarily pressure the back."
Seth Kleinman, head of energy research at Citigroup, agrees:
"The big move in the back of the (futures) curve reflects that,
unlike in 2008/9, this is not a short-term demand-led dip, but is
really a structural supply-led drop," Kleinman said.
The weakness of forward oil futures also reflected much less demand
from speculative fund managers, he said.
"The back end is all about flow and the weakness reflects ... less
commitment from hedge funds that the bull story will win out," he
added.
Other derivatives paint a similar story, with aggressive oil put
options - contracts giving the right to sell oil at a particular
level in the future - appearing as low as $35 and even $30 a barrel
for U.S. crude.
"Many analysts say oil prices can't stay this low for very long, but
that is not what futures markets tell us," said Olivier Jakob at
Swiss consultancy Petromatrix in Zug.
"They show no recovery in prices any time soon."
(Additional reporting by Simon Falush in London and Henning
Gloystein in Singapore; Editing by Dale Hudson)
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