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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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This Giant Oil Trader Sees Upside For Oil Prices

Oil

More than three years after Bob Dudley said that oil prices would be lower for longer, BP’s chief executive still thinks “a price of $50 a barrel looks like the right number to plan on for the rest of the decade.”

The majority of oil executives and industry analysts still believe that $50-$60 oil will continue as the new normal, with U.S. shale supply growing stronger every time oil prices rise above $50.

However, recent encouraging data about global oil demand growth is making some observers and players in the industry more bullish on oil prices. One small group thinks that lower for longer could end soon because U.S. shale can’t keep a lid on prices forever and can’t catch up with expected robust demand—all the more so that investments in conventional supply around the world have slumped since the oil prices started crashing.

Until a month or two ago, the market was weary of OPEC’s continuous jawboning and calls for patience while waiting to see markedly reduced global oil inventories. Then Q2 oil demand growth figures started coming in, and showed that demand growth was stronger than expected and would continue to be robust in the months to come. Also, the oversupply is now dropping faster and more consistently on the back of strong oil demand growth and the Brent futures flipping to backwardation, which discourages traders from keeping oil in storage.  

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“Commercial oil stocks in the OECD fell further in August and the difference to the latest five-year average has been reduced by 168 million barrels since the beginning of this year, however, there remains another 170 million barrels of stock overhang to be depleted,” OPEC said at the end of last month.

At this year’s Asia-Pacific Petroleum Conference (APPEC) in Singapore last week, the mood was the most bullish since the 2015 APPEC annual gathering, with most executives polled by Bloomberg predicting oil prices at $50-$60 next year, compared to last-year predictions that we’d be at the low end of the $40-$60 band. Still, just a few of the two dozen executives surveyed expect oil prices to average more than $60 in 2018.    

One notable exception from the herd is oil trader Trafigura, whose co-head of group market risk, Ben Luckock, said at a presentation at the conference, as carried by the Financial Times:

“We are nearing the end of ‘lower for longer’.”

“This theory may have had its best days,” the manager noted.

By the end of 2019, demand could outstrip supply by up to 4 million bpd, due to underinvestment during the downturn, and U.S. shale supply won’t be able to fill in the gap, according to Luckock.

Citi has also warned that oil supply would be tighter next year, as some OPEC members are already pumping at capacity, and can’t boost their oil output as much as the oil market thinks they might after the end of the OPEC cuts.

Still, almost every analyst believes that OPEC needs to continue to restrict supply throughout the whole of 2018 in order to clear the glut.

But as the glut diminishes and bullish sentiment increases alongside oil prices, U.S. shale producers are rushing to hedge again at the WTI prices above $50 to lock in future production.  

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“There’s been more producer-hedging in the past two weeks than in the past four or five months,” a banker told FT last week.

In its September Short-Term Energy Outlook, the EIA forecasts total U.S. crude oil production to average 9.3 million bpd this year and 9.8 million bpd in 2018.

While there’s currently no doubt that U.S. shale supply is set to increase, the pace at which it will grow will determine how much oil it would add to global supply. While most industry pundits continue to believe that the OPEC cuts/shale growth tug-of-war will continue to cap oil prices, the current mood in the market is a bit merrier than it was two years ago, one year ago, or even one month ago.

By Tsvetana Paraskova for Oilprice.com

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  • Citizen Oil on October 03 2017 said:
    "as some OPEC members are already pumping at capacity, and can’t boost their oil output as much as the oil market thinks they might " This is a ridiculous statement that has been proven wrong time and time again. This statement is also never backed up with valid reasons. Why are they at capacity ? Infrastructure constraint ? Not enough investment ? These can all change very quickly. Never underestimate how much oil can be pumped by OPEC or non OPEC.

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