The oil industry has started to whisper of a prospect that seemed unthinkable even a few weeks ago: the prospect of crude trading above $70 a barrel before the end of 2017.
Brent crude hit a two-year high of $64.05 a barrel on Monday, taking gains since June to more than 40 per cent and defying those who argued oil would be capped below $60 this year by higher output from the US shale industry.
The rising price of crude reflects the success of Opec’s output cuts to booming demand as the world enjoys near-synchronised economic growth. Saudi Arabia — the largest producer in Opec — is also in focus, with the arrests of at least 11 Saudi Arabian princes and dozens of senior officials and businessmen at the weekend raising tensions in a country responsible for roughly one in every nine crude barrels pumped globally.
In the US, shale producers — whose soaring output helped end the $100 oil era in 2014 — appear to have throttled back, with the number of rigs drilling for crude tailing off in recent months, as companies focus on boosting profitability.
The rally in crude has inevitably led to talk of just how much further oil can rise, with analysts at Bank of America Merrill Lynch saying on Monday it was possible Brent could see a “cyclical peak” of $75 a barrel in the near future.
Others have said that $70 a barrel has become a real possibility, with Opec’s members happy to reap higher short-term revenues after oil’s painful three-year downturn, despite the threat of rising prices encouraging a new wave of competing supply.
“We think both fundamental data and an improvement in trader sentiment act as strong support for a continued test of the upside for oil prices,” said Paul Horsnell at Standard Chartered.
Hedge funds raised outright bets on higher Brent prices to a record last week, holding paper contracts equivalent to almost 600m barrels.
The shift in short-term sentiment has been remarkable. At a major oil conference in London three weeks ago not one panellist or major attendee was seriously focused on oil reaching $70 a barrel.
Francisco Blanch at BofA said that while markets may overshoot in the short run, prices for oil contracts for delivery far in the future remained firmly rooted closer to $55 a barrel, suggesting the market was not yet prepared to buy into the rally outright.
“The rally in oil prices has coincided with a cyclical upturn in the global economy,” Mr Blanch said. “[But] higher crude prices at the prompt have not been matched by a similar run up in longer dated prices . . . The reality of this global oil market is that US shale producers are charged with providing the marginal barrel.”
He said if longer-dated prices reached even $60 he expected US oil output to start growing again at an annual rate of more than 1m barrels a day — more than 50 per cent higher than they currently forecast.
Energy Aspects, a consultancy, also warned that Russia appears cognisant of the risks of a prolonged rally to reignite the US shale boom. The country may try and rein in Opec’s price hawks at its meeting with the cartel on November 30 in Vienna, fearing the market could become flooded again.
“Russia appears to be trying to slow down the extension talk until there is more clarity on the outlook for balances and what they mean for prices in 2018,” Energy Aspects said.
Source: www.ft.com
