World’s 2nd-Biggest Sovereign Fund Sees Oil Glut Until Mid-2017

Is Oil Heading to $80 a Barrel?
  • Market must absorb inventories to re-balance: ADIA’s Ruehl
  • Oil price at $60 if supply disruptions intensify: Ruehl

The global oil glut will probably persist until at least next summer as markets take time to absorb excess crude in storage, according to the head of research at the world’s second-largest sovereign wealth fund.

Supply and demand for oil are coming back into balance, and the response of shale producers to rising prices will help determine how high crude can go, Christof Ruehl, the global head of research at Abu Dhabi Investment Authority, said Wednesday in an interview in Dubai. Ruehl’s view that the re-balancing will take until at least the middle of 2017 contrasts with the more optimistic outlook of some industry leaders and analysts who foresee demand nearing supply by the end of this year.

“The markets should work with the inventory overhang and then re-balance only once that overhang is gone,” Ruehl said. “When the winter season comes, we will have a clearer idea at which level this re-balancing occurs,” he said, adding that he expects the process “will go at least to the summer” of 2017.

WTI Crude

Markets are recovering from excess supply after OPEC decided in 2014 to let its members pump without limits in a struggle for sales with higher-cost producers including U.S. shale drillers. BP Plc Chief Executive Officer Bob Dudley said on June 16 that he expected the market to come into balance by the end of 2016, while the Organization of Petroleum Exporting Countries said in its latest monthly market report that excess supply would “ease over the coming quarters.” 

Average annual U.S. production would decline by 665,000 barrels a day in 2016 and 420,000 in 2017 at the current level of rig count, Goldman Sachs Group Inc. said in an e-mailed note on June 6. West Texas Intermediate crude traded above $50 a barrel on Wednesday as U.S. industry data showed a decline in crude stockpiles. WTI futures have gained more than 90 percent since dropping to a 12-year low in February.

Oil production and exports will become less volatile after disruptions end in Libya, Nigeria and Canada, said Ruehl, who worked previously as BP’s chief economist before joining ADIA, the largest sovereign wealth fund after Norway’s. Such outages have supported this year’s rally in crude prices, he said.

“What it takes to get to $60 is very simple: some more supply disruptions,” he said earlier Wednesday in an interview with Bloomberg TV. “What it takes to stay down is some of that oil coming back.”

Shale producers in the U.S. and elsewhere would only ramp up production if they have “reasonable expectations that prices will not be back to $30 or $20 in a few weeks time,” Ruehl said. “The stronger and faster shale production reacts to higher prices, the more limited the price increases.”

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