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Will Less Supply in the Very Near Future Mean Higher Oil Prices?

Will Less Supply in the Very Near Future Mean Higher Oil Prices?

Will Less Supply in the Very Near Future Mean Higher Oil Prices?

Oil industry leaders say they see the price of crude on the verge of recovery, though it’s not clear how quickly it will rise. The question is whether the global oil industry faces eventual long-term instability in oil prices.

In London, OPEC Secretary-general Abdallah Salem el-Badri said investments in new or expanded oil projects will be reduced by 22.4 percent to $521 billion this year – down $130 billion from 2014 – thereby reducing the supply of crude and putting upward pressure on prices.

“Less supply in the very near future. Less supply means high prices,” el-Badri said in a speech at the Oil and Money conference.

El-Badri’s expectations on investment were supported by the executive director of the International Energy Agency (IEA), Fatih Birol, who told the meeting that investments in oil projects this year will fall by about the same rate forecast by el-Badri.

“Upstream investment will be at least 20 per cent lower [this year] than in 2014,”said the chief of the Paris-based IEA, which represents 29 oil-consuming countries. “In terms of money spent, it’s the highest [drop] in history.”

Oil prices will also rise, ironically, because the current low prices have encouraged consumers to buy more fuel, according to el-Badri. He said he expects global demand for oil will rise by 1.3 million barrels a day in 2016.

The current low price of oil has strained the budgets of many oil-producing countries, including wealthy Middle Eastern states. The price of oil is now less than $50 per barrel, less than half what it was in June 2014. Yet el-Badri argued, “We are not in disarray. We see some light at the end of the tunnel.”

When will the end of that tunnel appear? Within the next 18 to 24 months, el-Badri predicted.

Ben van Beurden, the CEO of Royal Dutch Shell, doesn’t see oil prices stabilizing quite that soon, however. He told the conference that while oil prices are due to recover, their rise won’t be as fast as el-Badri expects.

“I see the first mixed signs for recovery of oil prices,” van Beurden said. “But with U.S. shale oil being more resilient than we originally thought and a lot of oil still in stock, it will take some more time to rebalance demand and supply.”

At its semiannual meeting in Vienna in November, OPEC, led by Saudi Arabia, decided to meet the crisis of lower prices not by cutting production, as it has in the past, but by keeping its 12 members’ combined output at 30 million barrels a day.

This strategy, promoted by Saudi Oil Minister Ali al-Naimi, was meant to keep oil prices low temporarily and starve many non-OPEC oil producers of profits and restore the cartel’s global market share. The primary target of the OPEC plan was oil production from shale in the United States, which relies on hydraulic fracturing. This technology can’t make money unless oil sells for at least $60 per barrel.

Meanwhile, OPEC members are also following the Saudi lead by increasing production even more, in an intensified effort to build market share. This pressure is likely to make it more difficult for oil producers in the United States to refinance their operations, according to van Beurden. “Producers are now looking for new cash to survive, and they will probably struggle to get it,” he said.

As a result, the Shell CEO said, there’s likely to be more upward pressure on prices, which not only could help stabilize oil prices, but also in the long-term could become a liability by causing a dangerous fluctuation in the value of oil: As prices rise, U.S. shale production increases, contributing to an oil glut, which forces prices down again – and so on.

“This could cause prices to spike upwards, starting a new cycle of strong production growth in U.S. shale oil and subsequent volatility,” van Beurden told the gathering.



Courtesy: Andy Tully

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