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Oil prices could take seven years to return to normal levels, warned energy analysts, reducing the prospect of the windfall tax on North Sea oil and gas operators being lifted in the near future.
Chancellor Rishi Sunak left the door open for a reversal in the policy when speaking to the Treasury Committee yesterday.
He revealed that the recently announced Energy Profits Levy will be withdrawn when oil prices returns to “historically more normal levels.”
When pushed on the matter, he suggested prices would need to drop to around $60-70 per barrel for the tax to be lifted.
He said: “I think that if you look at the average Brent price over the last, say, five or 10 years, that would give you a number of something like $60 or $70 oil.”
However, oil is currently trading near $120 per barrel on both major benchmarks, after eight years of trading below the $100 milestone.
Prices hit a 14-year high of $139 per barrel in March, and have remained elevated amid rebounding post-pandemic demand alongside fears of supply shortages following Russia’s invasion of Ukraine and persistent capacity issues at OPEC.
Western sanctions have furthered elevated supply shortage fears, with the European Union finalizing a ban on seaborne shipments earlier this month
The Energy Profits levy imposes a further 25 percent tax on North Sea oil and gas operators and is expected to raise £5bn this year to help ease household energy bills.
The Treasury is looking to harness record profits of North Sea oil and gas traders to ease spiraling energy bills for households and is expected to raise £5bn to partly fund a £15bn support package, which will provide up £1200 per year savings for vulnerable energy users.
While the tax has a sunset clause of 2025 – industry experts expect prices to remain elevated over the foreseeable future, with both high energy prices and high oil prices baked into tight markets over the long-term amid volatility and supply chain disruption.
Ole Hansen, head of commodity strategy at Saxo Bank, told City A.M.: “Given the current tightness driven by supply being challenged, not only due to Russian sanctions but also due to lack of belief in the long-term demand outlook for oil reducing much-needed investment into the sector, the outlook for lower prices looks fairly remote.”
“Looking at the Brent crude oil forward curve, the market is not pricing in sub $70 oil for the next seven years at least.”
Commenting on potential methods to alleviate high prices, Hansen said: “Apart from a more friendly view on Russia, being it through an unlikely regime change or a peace deal, only a deteriorating outlook for global growth lowering demand or sharply higher prices driving individual voluntary reductions could trigger lower prices.”
“Crude oil is most likely to stay above $100 in 2022 with the short-term risk pointing to even higher prices. This is on the assumption EU sanctions will be carried out, Russian production will fall and OPEC+ (excl. Russia) will struggle to increase production.”
Investec has also confirmed it expects the windfall tax to remain in place until the sunset date of December 2025.
In its report on the windfall tax, it said: “We model that it remains in place until the sunset date of end December 2025 (given we believe it unlikely any UK political party will reduce taxes on upstream producers).”
The wealth manager also warned the tax could deter investment and accelerate plans of operators to exit the North Sea.
Sunak revealed the Treasury remains in contact with the industry, and that gas prices would also have to be factored into any policy changes.
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