London’s International Petroleum Week is an opportunity to take the pulse of the oil industry at the annual whirlwind of parties and events, with traders and executives jetting in from around the globe.
A year ago, some were preparing to read out the last rites as crude languished near $35 a barrel. Twelve months later, the patient is very much on the mend.
A mantra of “lower for longer” has been replaced by “wait and see” as $55 a barrel oil pitches a resurgent US shale industry against Opec, whose production cuts helped lift oil back off the floor.
These are the five main talking points from the event so far.
1. Crude prices
Put any two oil traders in a room and the conversation will quickly turn to the price outlook. Stick 1,500 in a small selection of upscale bars and luxury hotels around Mayfair, and the debate can quickly become quite heated.
Crude oil might have trodden an incredibly narrow path so far in 2017, with Brent holding tight between $53 and $58 a barrel, but few think this period of stability will last.
Citi analysts including Edward Morse say that while oil faces headwinds, not least from a record hedge fund bet on the recovery, which makes crude vulnerable to profit-taking, they see the potential for prices to test $70 a barrel by the end of the year.
There could be a “rapid rebalancing over the course of the year” as Opec’s decision to reduce output from January 1 starts to be felt.
Longer term, the bank’s analysts align with those traders who think that Opec has essentially patched up a burst football.
Next year they expect US shale output, forecast to record a trough-to-peak recovery of some 500,000 barrels a day this year because of stronger prices, and keep oil under pressure.
The one area of broad agreement between bulls and bears is that the game-changing nature of US shale means that the boom stage of this cycle will be less dramatic than last decade. The return of $100 crude remains, for now, a forecast embraced only by dedicated contrarians.
If anyone in the oil industry enjoyed the price crash, it was the traders. By exploiting increased volatility and the opportunities to do so-called “carry trades”, buying up cheap crude to store until prices recover, many turned bumper profits that did not go unnoticed
While the price recovery means that the trading game is starting to look tougher, some of the world’s biggest oil companies are threatening to move into the space or expand their operations, having seen how rivals buttressed their bottom line against the downturn.
ExxonMobil’s decision to explore setting up a full-scale trading division continues to attract attention given that the company has traditionally shunned marketing third-party barrels. Royal Dutch Shell, BP and Total are watching closely.
Statoil, the Norwegian state-backed producer, is not waiting around. It plans to expand its trading arm, focusing on maximising profits from its producing, refining and storage assets.
“Scaling up the trading arm is something we’d like to do,” Statoil’s Jens Økland told the Financial Times. “It adds an element of resilience to the cycle.”
Statoil will contribute the largest share of production to the Brent benchmark, surpassing Shell from next year.
3. Brent Benchmark
S&P Global Platts, the oil pricing agency, announced the biggest overhaul of its Brent oil price assessment in a decade. It will add production from Statoil’s Troll field to the basket of four British and Norwegian grades that underpin the dated Brent benchmark.
The aim is to make it more robust and less vulnerable to manipulation as North Sea volumes decline, with Troll adding about 200,000 barrels a day, or 20 per cent, to the basket.
But while many traders have supported the move others believe the addition of Troll will be problematic. The new price assessment methodology will not reflect the crude’s differing qualities, they said. “They’ve done it, but not properly. They needed to add a quality premium,” said one trader.
1. Brent crude price hits 12-year low
2. Doha talks end in failure
3. Opec reaches agreement on how to distribute output cuts
4. Non-Opec producers such as Russia agree to join oil deal
5. Opec oil production cuts due to take effect
Opec has succeeded in pushing oil prices back above $50 a barrel after agreeing to cut production last year.
But for all the talk of unprecedented levels of compliance from its members, the big producers outside the cartel are falling short of their pledge to join the deal to help shore up the market.
Mohammad Barkindo, the group’s secretary-general, says there were “teething” issues in ensuring full co-operation from non-Opec.
“Conformity . . . is new to non-Opec. They have never been bound by any mechanism in the past.’’
January production data showed 90 per cent compliance with output curbs by participating Opec members. However, the 11 non-Opec members, including Russia, have implemented only about 50 per cent of the agreed cuts, according to Qatar’s energy minister, Mohammed Al Sada.
5. Renewables and rivals
From the Teslas parked outside the Grosvenor House hotel to the BMW i8’s in the showroom just minutes from the conference venue, there were plenty of reminders that the oil industry operates in a fast-shifting world.
Bernard Looney, BP’s head of upstream, says the industry faced increased competition, especially as alternative energy drops in price. It’s a change they want to embrace.
“Renewables costs are falling there is no doubt about it,” Mr Looney told the Energy Institute IP Week conference. “There are issues with intermittency, there are issues with storage. But it would be unwise for us to ignore it.”
BP has invested in wind farms though it plans to remain, first and foremost, an oil and gas company.
The majority at IP Week believe growing developing world consumption will keep oil demand robust, with renewable energy complimentary to fossil fuels, rather than looming as a quick replacement.
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