CERAWeek: outlook for oil market bleak

CERAWeek: outlook for oil market bleak

Giacomo Maniscalco
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Oil majors gathered at Houston are watching closely developments that will possibly influence a market in search of direction

It’s CERAWeek, and all of oil’s bigwigs have gathered in Houston to discuss the future of the oil market at the home of the prestigious think tank founded by Daniel Yergin. A trending topic was the confirmation that the OPEC output freeze will be extended. Speaking at the event, Saudi oil minister Khalid al-Falih said that there was "cause for cautious optimism as we see the green shoots of the recovery." Crunching the numbers for his audience, the minister went on to add that Saudi Arabia has cut its output to below 10 million bpd, and, along with other producers, cut production by 1.5 million bpd, and this in spite of low market expectations. Al-Falih warned that this good news should not induce investors to let themselves be carried away by "irrational exuberance." He also reminded his audience that non-OPEC will not be allowed to benefit from "free rides" based on rising prices to finance their own production investments. He also censured shale producers for discouraging long-term investments in conventional fuels, in his view, with a business model reliant on sudden jumps in output. ConocoPhillips CEO Ryan Lance did not wholly share the Saudi policy-maker’s line of reasoning, at least as far as concerns future trends in crude prices. The American executive is betting on "lower for longer," pointing to "a well-supplied world out there." He went on to add, "We've got to be prepared to not only survive but thrive in those kind of prices," referring to his claim that prices may reach as high as $70 or even $80 but also drop to $40 again over the next two years. However, according to the medium-term scenario put forward by Lance, prices should float at $50 for the next two years, and companies should focus their efforts on lowering breakeven costs as much as possible.

And in a well-supplied world, one eager customer is represented by India. The Asian giant has overtaken Japan as the world’s third largest oil consumer, and, according to a report by the International Energy Agency (IEA), it will surpass China as well. On top of that, the country will also overtake Russia to take third place globally in terms of refinery capacity. IEA director Fatih Birol, who was also in attendance at CERAWeek, cited numbers to support these conclusions, pointing out that China’s current per capita oil consumption stands at 3 barrels a year, a number destined to drop to 2.5 as the country transitions to a service economy. At the same time, India’s current 1.2 barrels a year is expected to rise to 1.5 barrels by 2022. That’s good news for oil producers.