The FT's Anjli Raval reports on how the outlook for oil is being shaped by a tug of war between Opec plus a group of producers who recently agreed to curb output, and a resurgent US shale industry that is increasing production.
Produced by Vanessa Kortekaas. Filmed by Steve Ager. Additional footage by Getty. Graphics by Russell Birkett.
It was late 2016 and OPEC producers reached the first deal cut production since the financial crisis. Prices quickly rebounded above $50 a barrel, but it wasn't long before those efforts to reassure markets was over powered by a tug of war between two competing factors. Output curbs by OPEC plus 11 producers outside of the cartel including Russia, and on the other hand a resurgent US shale industry that has ramped up its production. The world's biggest Energy Agency such as the IEA the oil market will re-balance by the second half of this year, but there are still questions about price. Brent crude is down by more than half since the mid-2014 peak. At a recent FDA commodity summit in Lausanne I asked some energy experts how quickly they believe the oil market will recover.
I think ultimately the cuts will work in bringing down the level of interest globally. It might take a little bit longer than what people expected, given the large amount of inventories that have been built around the world in the last three years. We estimate anything between 700 millions and a billion barrels of inventory built around the world. So it might take a little bit longer, but with continuous cuts we are pretty confident that OPEC cuts will work.
For the past few years an oversupply of oil has meant geopolitical events, including conflict in Libya and Nigeria, Russia's growing influence in the Middle East, and the rise of ISIS, have had a minimal impact on price. Now that production has taken a hit is geopolitics finally determining market movements?
Well, geopolitics have always mattered in the oil market. Relationship between countries, producing countries and producers. Relationship between Russia and the States, relationship within the Middle East, and between the Middle East and in Russia. I mean, all this has mattered. Are these the current dynamics which are really at stakes now? No they're not. I think it's market dynamics what we are witnessing. On the one hand, you have the conventional producers who want to maintain as high a price as possible. On the other hand, you have the shale producers who are waiting for high price to step in, and this is what they're doing right now. So the contention is there.
So how will this dynamic affect the price this year and beyond?
In the short term, we expect prices to sort of remain around current levels, or in a fairly sort of narrow range. But longer term, you know even despite the increase in US production, and the low cost base out of US production, you're going to still, on a global basis, need to face increased demand depleting production. And by doing so, you're going to have to have a reasonably high price to attract capital to invest in that industry. So we expect that the longer term prices to be higher than we currently are.
OPEC ministers next meet in May, when they'll decide whether to renew the agreement. But any extension depends on the backing of non OPEC producers such as Russia, as well as how quickly global stockpiles move to average levels. In the meantime, the battle between OPEC and US shale continues. Anjili Raval, Financial Times, Lausanne.