Byron Wien, the 79 year-old chairman of Blackstone Group LP’s advisory services unit, is forecasting an annual drop in oil prices for the first time in his career as swelling production pushes global inventories higher.
Wien, who joined the world’s biggest private-equity firm in 2009, said the U.S. will extract more crude by fracking rocks and expects the furor over a potential conflict with Iran to dissipate. Brent crude lost 2.8 percent last month after surging 14 percent in the first quarter on concern Iran may disrupt Middle East exports in retaliation for a European oil embargo.
Russia and Saudi Arabia, the biggest crude producers, are pumping near record levels, helping push February inventories in developed nations to the equivalent of 59.6 days of demand, the most since 2009, according to the International Energy Agency.
“The Iran premium is going to come out of the price of Brent,” Wien, who was previously a chief strategist at Morgan Stanley, said in an April 26 television interview on “Bloomberg Surveillance” with Tom Keene. “There’s an Iran premium in the price of oil, thinking that Israel will strike Iran, and I don’t think Israel will.”
Brent, the benchmark for more than half of the world’s oil, closed at $119.66 a barrel on the London-based ICE Futures Europe exchange yesterday and fell to $118.20 today. The Centre for Global Energy Studies expects a jump in worldwide stockpiles this quarter to the most since the Asian financial crisis 14 years ago, when crude plunged below $10 a barrel.
Not Since 1998
“A rebound in production is causing stocks to grow quite rapidly,” said Leo Drollas, chief economist at London-based CGES, a researcher founded by former Saudi Arabian Oil Minister Sheikh Ahmad Zaki Yamani. “Even more disturbing is that the build in the second quarter is going to be massive. We haven’t had something of that magnitude since 1998.”
While analysts aren’t predicting that Brent will tumble to $10, oil risks falling to $100 for the first time since October should the abundance of crude persist. Six out of 30 analysts forecast the North Sea crude will average $100 or less this quarter, predictions compiled by Bloomberg show. The median estimate is $115.50.
There’s a “lack of appreciation” of how much oil will be extracted from hydraulic fracturing, or fracking, of rock formations in the U.S., particularly North Dakota, Wien said. The state, home to the Bakken shale-rock fields, produced a record 558,255 barrels a day in February, its Department of Mineral Resources said.
Wien has been making annual forecasts since 1986, when he was chief U.S. investment strategist at Morgan Stanley. In January 2011, he said oil would rise to $115. West Texas Intermediate crude in New York peaked that year at $114.83 on May 2, up from $91.55 on Jan. 3.
Speculation that international pressure on Iran to give up an alleged nuclear weapons program would lead to conflict or a supply disruption helped push the commodity to $128.40 a barrel in March, the highest in more than 3 1/2 years. The U.S. has tightened financial sanctions against Iran while the European Union agreed to stop buying the country’s crude from July 1.
The Organization of Petroleum Exporting Countries pumped 31.4 million barrels a day last month, the most since 2008, according to data compiled by Bloomberg, to calm soaring prices even as output from Iran dropped. Regional crude prices are falling. Qua Iboe, Nigeria’s most abundant blend, yesterday slipped to its weakest premium versus the Dated Brent benchmark in 18 months.
Iraq, Libya Surging Too
Aside from Saudi Arabia, which holds most of OPEC’s spare capacity, other members are also pumping more. Iraq boosted exports to 2.51 million barrels a day last month, the most “in decades,” Falah al-Amri, the head of the State Oil Marketing Organization, said in a telephone interview yesterday. Libya hopes to surpass its pre-rebellion output of 1.6 million barrels by June, Nuri Berruien, the head of state-run National Oil Corp., said in an April 25 interview in his office in Tripoli.
“Saudi Arabia, Kuwait and the United Arab Emirates can easily make up for Iran losses,” said George Abed, director for Africa and the Middle East at the Institute of International Finance in Washington, which predicts Brent crude will drop to $105 a barrel next year.
During the Asian crisis, the group agreed to raise output at a November 1997 meeting in Jakarta. Crude subsequently plunged 36 percent in 1998, touching a low of $9.55 on Dec. 21. The 12-nation producer group hold its next formal meeting on June 14 in Vienna. Several OPEC ministers will attend an industry conference in Paris tomorrow.
“OPEC will have to cut production to avoid prices dropping below $100 by summer,” Drollas said.
Global stockpiles will build by 1.2 million barrels a day in the second quarter, the most since the same period in 2005, when oil averaged about $55 a barrel, according to JBC Energy GmbH, a Vienna-based research company whose clients include ConocoPhillips, Kuwait Petroleum Corp. and Statoil ASA.
“The market is not tight,” said David Wech, head of energy studies at JBC, who forecasts Brent dropping to $111 a barrel in the third quarter, from $117 in the second. “Saudi Arabia is producing at very high levels, demand is weak so refiners aren’t buying. Russian and West African prices are low, so from the physical market perspective prices will come down.”
Saudi Arabia, Russia
Saudi Arabia, the world’s biggest crude exporter, said last month it was producing 10 million barrels a day, near the highest in at least three decades, as it seeks to calm fears of insufficient supply. Russian oil and condensate production held near a post-Soviet record, averaging 10.33 million barrels a day in April, according to data released today from the Energy Ministry’s CDU-TEK unit.
Inventories in industrialized nations rose by 22.6 million barrels in March, compared with a five-year average decline of 10 million barrels, according to the IEA. Crude supplies in the U.S., the world’s biggest consumer, rose 2.84 million barrels to 375.9 million last week, the most since September 1990, as the nation’s production climbed to the highest in 12 years, government data released today show.
Qua Iboe traded at a $1.35-a-barrel premium to benchmark Dated Brent on April 30, according to data compiled by Bloomberg. Russian Urals, the world’s largest spot traded crude, changed hands in Europe at its lowest spread in almost one year, while North Sea Forties, one of the four grades used to price Brent, tumbled to a two-year low earlier this month.
Mahmoud-Reza Sajjadi, Iran’s envoy to Moscow, said April 25 officials are considering a Russian proposal to avert sanctions, while Israel’s top military chief Benny Gantz said Iran’s leadership is “rational” and won’t seek to build a bomb.
Hedge funds and other money managers have reduced bullish bets on London-traded Brent futures contracts for four consecutive weeks, ICE data show.
“Supply concerns seem to be overstated, so prices should continue to slide,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, who in March correctly predicted prices had peaked in the short term.