- Vitol Predicts Oil Stockpiles Will Keep Growing Amid Surplus
- Goldman Sachs Says Crude Prices Could Drop `Into the Teens'
As the oil industry gathers in London for its annual round of cocktails and conferences one message is coming through loud and clear: the worst of the price slump isn’t over.
Crude is trading close to $30 a barrel after falling to a 12-year low last month, but production is still taking longer than expected to decline and record oil stockpiles just keep on growing, according to bankers, traders and executives attending the IP Week conference. There are few signs that prices will rise, and plenty of risk they will drop further.
“I wouldn’t be surprised if this market goes into the teens,” Jeff Currie, head of commodities research at Goldman Sachs Group Inc., said in an interview with Bloomberg Television in London. “The most striking feature of this market, relative to past cycles, is the lack of a supply response” and the current surplus is probably more extreme than the industry downturn of 1998 to 1999, he said.
International Petroleum Week brings together more than 1,000 people from the global industry, from producers and refiners to traders and bankers. More than a year into a downturn sparked by OPEC’s decision to keep pumping to defend market share, much of the industry has little reason to party. Prices are still 70 percent below their 2014 peak and companies are beset by plunging profits, dividend cuts and mass layoffs.
While West Texas Intermediate crude, the U.S. benchmark, dropped 5.9 percent to $27.94 a barrel Tuesday, the lowest close in three weeks, and traded at $28.43 at 8:18 a.m. London time Wednesday.
The anticipated decline in oil production resulting from low prices is taking longer than expected, according to Christopher Bake, a member of the executive committee at Vitol Group, the world’s largest independent oil trader. Both conventional crude production and U.S. shale output have been “sustained” better than forecast, he said in London.
U.S. shale fields are pumping more oil and gas than previously estimated, according to the Energy Information Administration. The seven major shale formations in the country will produce 5.02 million barrels a day in February, up from last month’s forecast of 4.83 million a day, the EIA reported Monday.
This means global oil inventories, already at a record, will continue to expand. About 360 million barrels of crude and refined products -- or about 2 million a day -- will be placed into storage over the next six months, Bake said. That’s a surplus equivalent to the output of Nigeria, Africa’s largest oil producer.
Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, said Goldman’s Currie.
The capacity to store oil has been exhausted in some places, which means “prices have to spike below cash costs because you have to shut in production almost immediately,” Currie said. Inventories at Cushing, Oklahoma, the delivery point for U.S. crude futures, reached 64.2 million barrels in the week to Jan. 15, the highest in data from the Energy Department that extend back to 2004. National stockpiles are also at a record.
There was little evidence in London that the architects of oil’s slump -- Saudi Arabia and its Gulf allies Kuwait, the United Arab Emirates and Qatar -- were feeling enough financial pressure to reverse their policy of letting prices fall in order to squeeze rival suppliers.
At the first big IP Week party, Kuwait Petroleum Corp. welcomed guests with hospitality that was no less generous than in 2014. Beneath the chandeliers of a ballroom at the Four Seasons hotel in London’s exclusive Mayfair district, tables were laden with shashlik, sushi, oysters and even a whole lamb carved by a chef. In a separate room devoted to dessert, guests could discuss the latest developments in the oil market while spearing strawberries for dipping into a chocolate fountain.
Iran, Saudi Arabia and Iraq are all still turning up the taps, increasing the risk of further price losses, the International Energy Agency said in its monthly market report Tuesday. Total crude supply from the Organization of Petroleum Exporting Countries rose to 32.6 million barrels a day in January, an increase of 1.7 million from a year ago, it said.
“With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term,” the IEA said. “The short-term risk to the downside has increased.”