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September
28
2018

$80 Oil: Increased Investment Or Demand Destruction?
Tim Daiss

Amid all of the talk and conjecture of where global oil prices are heading, Shell CEO Martin van Beurden said yesterday that $80 per barrel is not an unreasonable price. When asked in a CNBC interview if he agreed with a statement from the OPEC-meeting this past weekend that the oil market is well supplied, van Beurden said “the market was a little bit tight in general, if you compare that to where we were a few years ago, the market has been tightening up.”

“Of course the market is well supplied, but not running out of oil at this point in time but it’s also fair to say that first of all volumes in storage have come down as spare capacity has been lower than it has been before so I think there is a bit of tightness coming in the market and you see that reflected in prices.”

When asked if that was why Brent crude was nearing four-year highs, he said that it’s part of the reason, but in the near-term crude prices are determined by sentiment and what is happening on the geopolitical scene “so it’s very hard to make predictions on it, but $80 oil [is] not an unreasonable price.”

Market uncertainty

Global oil prices are indeed trending upward based on not only supply and demand fundamentals, but also on geopolitical uncertainty. On the supply side, fresh sanctions slated to hit Iran’s energy sector on November 4 are already taking a toll, with predictions that as much as 2 million barrels per day (bpd) of Iranian barrels will be removed from global markets. There is also continued uncertainty over oil production in Venezuela, Nigeria and Libya - all OPEC members. 

New sanctions against Iran also cross over in to geopolitical worries for oil markets as the U.S. as well as Iran’s regional rival Saudi Arabia and some of its Gulf Arab allies find themselves on opposite sides in the ongoing Syrian Civil War and fighting in Yemen as well as other issues.

Until this week both geopolitical uncertainty and supply problems seemed to be factored into global oil prices, now however, after producers that met in Algiers this weekend failed to commit to ramping up production, oil prices have a reasonable chance of hitting the psychologically and economically damaging $100 price point - a price at which demand destruction would kick in, if not sooner.

Many oil traders are already predicting $100 oil, in what appears to be a worst case scenario for both global consumers and the impact high oil prices have on countries that rely heavily on imports as well as finished oil products, including Japan, South Korea and India and to a large degree China. Oil has not reached the $100 per barrel since 2014.

With U.S. production now at around 11 million bpd, a dynamic unthinkable at the start of the decade, it seems surreal that prices could be poised for such a demonstrative move with the corresponding knock-on effect of spiraling prices Americans will pay for gas at the pump.

Predicting just when demand destruction, the point where high oil prices start to destroy demand, could commence is not an exact science since it’s based on several factors, including how consumers will respond. Yet, amid certain demand destruction as well as the impact of the ongoing trade war between the U.S. and China that will also hurt global economic growth thus oil demand, $100 oil will not be sustainable 

Higher oil prices needed

However, van Beurden said that higher prices may actually be needed.

“I think we need to have slightly elevated prices to bring new supply which is going to be the main challenge.”

Van Beurden is referring to declines in new oil production investment, with companies still feeling the pinch from the marked drop in global oil prices from 2015 through 2017 that caused oil producers to forgo the CAPEX intensive new projects that are needed to meet growing global oil demand that has now reached around 100 million bpd.

As far back as last year, state-run Aramco warned that the world might be heading for an oil supply shortage following a steep drop in investments and a lack of fresh conventional discoveries.

Unconventional shale oil and alternative energy resources are an important factor to help meet future demand but it is premature to assume that they can be developed quickly to replace oil and gas, Aramco CEO Amin Nasser said at the time.

“If we look at the long-term situation of oil supplies, for example, the picture is becoming increasingly worrying” he added.

Fast forward to this year, and these worries persist, as alluded to by van Beurden, yet if oil does indeed continue its upward swing, oil companies will again restart postponed or canceled projects.

By Tim Daiss for Oilprice.com

 

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets and geopolitics for Forbes, Platts, Interfax, NewsBase, Rigzone, and the UK-based Independent (newspaper) as well as providing energy markets analysis for subscription newsletters. I've also authored geopolitical reports and analysis for Singapore-based consultancy Enerdata.

My analysis and news reports have been cited in media outlets around the world, including in the US, Japan, China, Vietnam, the BBC in the UK, and Russia and have been translated into several languages and used in television news reports

I'm a former columnist for five Georgia-based newspapers, hosted a 30-minute news talk show on CBS affiliate WTOC-TV Savannah, and the author of four books.

 

 

 

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