Low oil prices drawing to an end, say experts

The age of persistently weak oil prices is nearing its end, with demand booming and a supply squeeze in the offing, according to trading giant Trafigura.

The global market could face a shortage by 2019, Ben Luckock, co-head of group market risk at the third-largest independent oil trader, said at the S&P Global Platts conference.

As much as 9 million barrels a day of supply could be lost to crude-well declines by 2019, and the company is bullish on demand, he said, especially in India, the world’s fastest-growing oil consumer.

“We are nearing the end of ‘lower for longer’ oil,” Mr Luckock said, referring to a term used as far back as April 2015 by BP boss Bob Dudley as a global glut wreaked havoc on crude prices worldwide.

The forecast was made as the who’s who of the oil industry gathered in Singapore for the annual Asia-Pacific Petroleum Conference, where participants turned bullish and executives pointed to strong demand and falling inventories.

If proven right, it would brighten the outlook for Big Oil, which since 2015 has tightened its belt to weather the crisis, and help crude-rich countries, potentially affecting local equities, sovereign bonds and currencies.

Trafigura’s view that demand is set to outstrip supply mirrors Citigroup, whose global head of commodities research said that a market squeeze may emerge as early as 2018.

Strong economic growth is boosting oil consumption well above historical levels, according to BP, while Opec and its allies curb output.

A surge in US shale production that spurred the Organisation of Petroleum Exporting Countries to pump at will to defend its market share exacerbated a market oversupply over the past three years, driving the biggest price crash in a generation.

Opec this year changed tack by curbing output in a bid to shrink the glut.

When BP’s Mr Dudley referred to ‘lower for longer’ prices in April 2015, global benchmark Brent crude was trading near $63 a barrel.

By the following January, it had dropped to below $30 and hasn’t made it back above $60 since. Futures are still trading more than 50% lower than mid-2014 levels.

The weaker oil prices have boosted sales of low-efficiency sports utility vehicles in the US and China, potentially boosting fuel demand, according to Trafigura’s Mr Luckock.

He sees the growth in electric vehicles occurring too late to ease coming oil supply problems.

Even if all new US vehicles were electric vehicles, it would still take more than 12 years to replace fleets, he said. Meanwhile, in the American shale oil patch, productivity is diminishing. The region’s productivity is falling steadily after reaching a peak, according to Mr Luckock.

“We see the market over the next six months going well above $60 for a simple reason ... surprisingly good demand,” Adi Imsirovic, head of oil trading at Gazprom Marketing and Trading, told the conference.

Opec and non-members led by Russia decided in May to extend oil output cuts by nine months to March 2018 to tackle a global glut of crude that had led oil prices to halve and their revenues to drop sharply over the previous three years.

Nonetheless, crude oil prices in the US fell yesterday, giving back some of the 3.1% advance to a five-month that pushed the oil market into bullish territory.