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Will We Ever See $100 Oil Again?

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Alexis Arthur

Alexis Arthur

Alexis Arthur is energy policy associate at the Institute of the Americas, a think tank on Western Hemisphere Affairs based in La Jolla, Calif. She…

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Top Factors Undermining Any Oil Price Recovery

Top Factors Undermining Any Oil Price Recovery

Global oil prices have returned to a state of flux. This is hardly news to any who follow the oil markets closely and yet prices continue to drive international headlines.

While oil prices are notoriously difficult to predict, it has failed to deter the speculators. There are those warning that the latest dip is a precursor for $40 a barrel, a catastrophe for oil markets in some minds. On the other end of the spectrum are the optimists betting on a return to $100 by 2020. The World Bank has taken a typically middle-of-the-road approach, with forecasts of $57 a barrel in 2015.

That said, given Iran’s potential revitalization, Russia’s murky outlook, and U.S. shale supply limits uncertain, prices will be responsive to supply and demand trends; at least in the short to medium term.

The Iran deal could be a game changer for global oil supply. Lifting oil sanctions could pave the way for foreign capital to return to the country, contributing to a resurgent Iranian oil industry.

The Iranian oil ministry is optimistic about the nation’s recovery, predicting 400,000 barrels per day of exports almost immediately and an additional 600,000 barrels per day over six months.

Such a swift return is unlikely.

Iran was once the second largest oil producer in OPEC before Europe banned purchases of its crude in 2012. Since then, oil production has declined from around 3.6 million barrels per day in 2011to just 2.85 million barrels today. Related: Saudis Expand Price War Downstream

The nation is still OPEC’s fourth largest producer but its output is far closer to Mexico’s than Saudi Arabia’s. Oil exports have declined by 1 million barrels per day during this time.

Iran has significant onshore and offshore reserves but has lacked the technical capacity and capital to develop them in line with its ambitions.

Executives from Shell have reportedly met with Iranian officials to express their interest in re-entering Iran. U.S. companies, meanwhile, risk losing out unless Congress decides to lift its own decades-old restrictions on dealing with Tehran.

In an era of low oil prices, Iran has among the cheapest oil to produce at an estimated cost of $5 - $10 per barrel. The nation’s strategic geographic position between European and Asian markets is also attractive. European and Asian companies - unfettered by the limits on their U.S. competitors - will no doubt take advantage of this high-risk but high-reward opportunity.

Still, a return to 2011 production levels will take time, as will its impact on global oil supply and prices.

That Russia’s economy is struggling is no secret. But in spite of severe economic and political crises, Russia’s crude output has continued to grow. Earlier this year, Lukoil Vice President Leonid Fedun warned that Russia’s output could fall by 800,000 barrels per day. A lack of investment may indeed eventually catch up with Russian production but in the meantime, like the U.S., oil supplies will continue to rise. Related: 9 Reasons Why We Should Be More Worried About Low Oil Prices

U.S. oil producers have also defied expectations as shale oil production continues apace. Efficiency gains and cost savings have allowed innovative producers to elude assumptions about the price floor for shale, for the moment at least.

Of course, all is not rosy for shale producers. Tens of thousands of oil workers have lost their jobs, companies have lost value, and some have gone bust. And the question remains how low they can really go and how long they can last – particularly those already incurring losses but holding out in the hope of a price recovery.

Still one would be foolish to dismiss shale producers’ resilience and without a doubt the U.S. will remain a key player in the global oil supply outlook.

In the longer term, another factor too often left out of the debate is the knock-on effect of slashed exploration budgets across the oil majors and national oil companies. Projects have been suspended, and companies are demonstrating increased caution in frontier – high risk – areas. This is a trend already apparent in the Western Hemisphere as Brazil, Mexico, Argentina, and others jockey for a smaller pool of exploration funds. Related: Oil Price Rout Set To Inflict Real Pain On Russia

But this is just the supply-side of the equation. On the demand side, the International Energy Agency’s latest oil market report shows demand slowing in 2016. This would indicate a continued resistance to oil prices returning to anything resembling the pre-2014 fall.

Overall, the trends may be clear but the prices are not. For planning purposes alone, the only thing worse than low oil prices is market volatility and uncertainty will continue to rule in the short to medium term. In the meantime, oil price speculation – while entertaining – is a poor reflection of market reality.

By Alexis Arthur for Oilprice.com

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  • Ken Church on July 28 2015 said:
    As a lurker to these oil pages my comments lack the depth of insiders and long time players in oil. None-the-less there is a theme here that seems pretty obvious.

    There is an oil tank somewhere that is constantly draining and filling at the same time. During the last several months the level is rising, not hovering in a managed way, and certainly not falling and does not appear to be heading in that direction any time soon.

    It seems to me a review of the history over the last decade there are 2 factors that particularly point to where oil prices are likely headed for some time to come.

    First we had Iranian oil taken off the market. Next we had Libyan oil taken off of the market. During that time prices went to a sustained high level in the $100 per barrel range over several years. The industry reacted by finding mere cleverly extracted oil but this was afforded by the higher prices.

    Now we have all of this clever oil flowing into that tank. Once these taps are opened they will continue to drain into that big oil tank for some time to come simply because the existing investments are already in place and turning off the tap is counter productive to the investors getting a return on those investments.

    Much has been said about depletion rates of fracked oil over the first year or two but what is rarely talked about is that these wells become low volume producers at a relatively sustained level of 10% of initial production for 10 years or more. Yes the new wells drilled last year drop off quickly but every well drilled gets added to the pipeline feeding that big tank. Every year these new wells become less of a net contributor to the flow of oil already in the clever oil pipeline so their rapidly declining production rate is less effective in reducing the net flow into the tank from clever oil.

    Now we also have with the advance of these same clever technologies new efficiencies in this clever oil production. What new technology investment was once justified at $100 oil costs less to practice today (however $50 oil will not likely be viable). There also exists a smaller world out there. Governments in third world countries all realized that they had or likely had oil under their feet too so they opened their doors to oil production on their soil.

    On the oil tank drain side we have lots of reasons for pessimism. Simply stated there is nothing on the horizon to suggest that oil consumption is likely to continue to escalate anywhere near what we have grown used to.

    So lets now consider all that locked in oil in Iran and Libya. Here we have world production easily keeping up with demand. As we just witnessed with Iran a stroke of the pen can be anticipated to open up a huge river of oil back into the world and resolving problems in Libya can have a similar effect (and that problem will ultimately be resolved). Iran also had some 60 million barrels of oil in their own private holding tank (floating off shore storage tankers) that they are quite anxious to dump into our big tank!

    Ok so now we nervously look back at that big tank where all that oil is flowing into and we realize that the flow of oil into it will not slow quickly enough nor will the flow out increase quickly enough and we have a situation where something will have to give. Mercifully this is a very big tank. The higher the head pressure in the tank the faster will become the flow out the drain pipe at the bottom but that will only occur if prices go desperately low to encourage new consumption. Eventually balance will be restored but only through a likely normal reduction in production and modest increase in use.

    Frankly this will take a lot of time and the pain will be enormous!
  • M O Donovan on July 29 2015 said:
    I absolutely agree! its time was all saw some common sense! loved your article.

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