By John Richardson
EARLIER this year I said that crude prices in the region of $30 a barrel were perfectly possible. Now, rather belatedly I feel, Goldman Sachs and other some other
analysts are waking up to this possibility, with Goldman even going as far as saying $2o a barrrel is possible.
Chemicals companies cannot afford anymore of this kind of “rear view analysis”. The good news is that developing a clear view of the road ahead is a lot easier than you think. All need to do is to:
1. Accept that the Saudis are not going to blink. They are pursuing a long-term market share strategy.
2. Accept that US shale oil producers will continue to innovate and so push production costs further down. And anyway, it’s a Catch 22 situation. If prices do edge up shale production will also edge up, thus placing a cap on price rises. Shale producers are the new “swing” producers.
3. Come to terms with the fact that we have gone past peak demand growth for oil. China’s economy will, for example, become much less energy-intensive in general as it changes its growth model. Oil will also, wherever possible, be replaced by natural gas and by energy made from coal for environmental and local job-creation reasons. Demographics in the West mean that here too, demand growth has peaked. The Saudis understand this – hence, their market share strategy. If they do not pump as much oil as they can right now, they run the risk of leaving their most-valuable national asset in the ground.
Then you won’t suffer the shock that many of my contacts have experienced over the last few days following the latest Goldman forecast. You will remain calm because the possibility of crude in the region of $20 will already be built into your scenario planning.
On many other occasions over the past 14 months, we have seen data on record levels of crude in storage, resilient high production and weak global demand drive the oil price down. Compounding these falls has been the threat of Fed tightening.
The more that things change the more they stay the same. Over the last few days we have been told that:
• There is a “massive cushion” of crude oil around the world, with global stockpiles sitting at a record 3 billion barrels, according to the International Energy Agency.
• A stunning 487 million barrels of crude is sitting in US inventories, levels unseen at this time of the year in the last 80 years, according to the Energy Information Administration.
• The amount of crude sitting in storage has now risen for eight weeks in a row as Iran waits to re-enter the market. Iran will of course also go for market share rather than price, as it needs to win back customers in order to undo the damage of sanctions.
• ABN Amro senior economist Maritza Cabezas says that other economists have largely misjudged how cheap oil would affect US growth. They assumed that consumer spending in line with savings being made at the petrol pump, when instead people were generally using the spare cash to reduce their debts or save, said Cabezas.
• The European Central Bank looks set to expand its quantitative easing programme just as the Fed raises interest rates. This would mean a stronger dollar and so cheaper oil.
• China is staying the course, which has resulted in more disappointing data such as the 19%fall in October imports as its industrial sector slowed down. A clear sign of China’s resolution on reforms is this year’s 8% fall in credit growth.
The tide may come in again, enabling Warren Buffett’s famous naked swimmers to temporarily hide their embarrassment. Geopolitics or a fourth round of Fed quantitative easing could drive prices back up – perhaps even to as high as $100 again. But the fundamentals will have not changed.
How long will these new fundamentals remain in place? A lot longer than the 2-3 years or so that most analysts believe will be the maximum period of time it will take for the crude market to return to something pretty much resembling the “Old Normal”.