A year after oil sank into a bear market, the industry is still hunkering down for a long period of low prices, with Europe’s biggest producer seeing only the first glimpses of a recovery.
In the last five months, US production sank by 590,000 barrels a day, or more than 6 percent. The bad news: Drillers are cutting costs with a speed and brutality not seen in decades, enabling many to continue producing at a high level even as prices remain low.
Goldman Sachs Group Inc. sees crude falling by another $10 a barrel as storage tanks fill up in the coming months.
“I see the first mixed signs for recovery,” said Ben Van Beurden, Royal Dutch Shell Plc’s chief executive officer, speaking at the Oil & Money conference in London.
Still, the company is planning for a long period of low prices, he said: “With US shale oil being more resilient than we originally thought and a lot of oil still in stock, it will take some more time to rebalance demand and supply.”
West Texas Intermediate crude, the US benchmark, slumped by almost half in the past year and traded at $49.36 a barrel at 1:13 p.m. Singapore time. The world has been awash in crude since OPEC decided last November not to reduce output, focusing instead on protecting its market share from rising shale supplies.
“We see some light at the end of the tunnel,” OPEC Secretary-General Abdalla Salem El-Badri said at the London conference. “There is one problem now we are facing, we have an overhang.” While the market is improving and prices may rise in coming months, the current situation could persist for as long as two years, he said.
Oil companies worldwide will cut investments in oil exploration and production by a record 20 percent this year, which will eventually reduce or eliminate oversupply, said International Energy Agency Executive Director Fatih Birol.
The oil industry will defer more major projects again next year, said Ali Moshiri, Chevron’s president of exploration and production in Latin America and Africa.
A price of $45 a barrel is too low to give an incentive to shale producers to invest in new production, said Mark Papa, a partner at private-equity firm Riverstone Holding LLC.
“We are about to see a pretty dramatic decline in US production growth,” said Papa, who built EOG Resources Inc. into the biggest US shale producer as CEO from 1999 to 2013.
“In May and June we saw the first signs of reduced production,” Shell’s Van Beurden said. “This could entail higher prices, if OPEC at the same time can come to an agreement on how to accommodate the aspirations of Iraq and Iran, in particular, to grow their oil production.”
Iran is preparing to bounce back from sanctions that choked off investment in its oil and gas industry. Successful implementation of a July deal to curb its nuclear program would allow the country to ramp up production. The nation will pump 4 million barrels a day within a year of the removal of sanctions, said Mehdi Hosseini, the chairman of Iran’s oil contracts restructuring committee. It produced 2.8 million barrels a day last month, according to data compiled by Bloomberg.
Iraq boosted crude production last month by 17 percent from a year earlier to 3.9 million barrels a day, according to Oil Minister Adel Abdul Mahdi. The exporters’ group has pumped more than its 30 million barrel daily output target for 16 straight months, according to data compiled by Bloomberg.
Additional output from OPEC members Libya, Saudi Arabia and Kuwait may also swell global supplies, said Jeff Currie, head of commodities research at Goldman Sachs.
“Our baseline forecast is for $45 with a trough of $38 during the autumn,” he said. Prices could even fall as low as $20, the bank said last month. “What’s driving that trough, and what was the genesis of our $20 scenario, is essentially blowing out storage capacity,” Currie said.
US crude stockpiles are about 100 million barrels above the five-year average even after the nation’s production has fallen 5 percent from a peak of 9.6 million barrels a day in June. They probably expanded by 2 million barrels last week, according to a Bloomberg survey before EIA data Wednesday.
Total inventories in rich industrialized countries were a record 2.9 billion barrels in July and preliminary data suggest they rose again in August, according to the IEA.
“US supply has taken nearly a year to start dropping,” said Adam Sieminski, Administrator of the Energy Information Administration, the U.S. Energy Department’s statistical arm. “I’ve seen many price cycles” and global supply will come back into balance, he said.
OPEC alone can’t clear this surplus because it was created by producers outside the group, said El-Badri.
The crude-supply adjustment involving canceled projects, idled drilling rigs and fired workers has some way to run, and more pain to inflict on the industry. Companies have already made the deepest cost cuts since 1999, said Bernard Duroc- Danner, CEO of Weatherford, the world’s fourth-largest oil services provider.
“The brutality of the cost side, I haven’t seen anything like that since perhaps 1999,” he said. “Although North America took the brunt of the pain, the pain is spreading internationally fast.”