Global Oil Markets – Current Developments and Future Prospects
In this presentation, given at the Bank of England, Bassam Fattouh looks at current developments in the oil market and explores some short and medium term prospects and concludes with the following observations:
• It is important to be clear about causality; it is supply and demand imbalances that cause stocks to rise and for the shape of the curve to switch to contango.
• High levels of stocks will continue to put downward pressure on the oil price and on time spreads. Until stocks are drawn-down, any potential price recovery will be capped.
• Most pressure will be felt on light sweet crudes and on the Brent structure given that the North Atlantic (ex-US) has become the clearing destination for light sweet cargoes.
• Saudi oil policy is not constant and Saudi cuts should not be excluded but the bar to implement the cut has risen. Saudi Arabia output policy has become less flexible both on the upside and the downside and its signaling power has reduced.
• The perception of the loss of supply feedback to clear markets affects market sentiment, increasing volatility and increasing the risk premium in investment in energy projects.
• Clearing excess supplies through supply and demand adjustment to lower prices is subject to uncertainty and lags.
• So far demand growth has done most of the work, though it has not been strong enough to absorb the entire glut.
• The supply response is yet to come, but global supply has become more varied and the nature of the investment cycle has changed – there are three investment cycles being superimposed on each other: The US shale cycle; the non-OPEC ex- US cycle; and the OPEC/Middle East cycle. The outcome of these combined investment cycles on output is yet to be seen.
• A key question remains: If non-OPEC outside the US falters and OPEC investment does not materialise, can US shale fill the projected gap?