It seems oil traders are right to be cautious about driving the price of crude oil higher in the aftermath of the OPEC deal which is mooted but as yet unfinalised.
In a new post on the IMFDirect site, Rabah Arezki and Akito Matsumoto write that even though oil prices have “stabilized somewhat in recent months, there are good reasons to believe they won’t return to the high levels” before the collapse in 2014.
That’s because “shale oil production has permanently added to supply at lower prices” and “demand will be curtailed by slower growth in emerging markets and global efforts to cut down on carbon emissions”, they wrote.
“Shale oil has been a game changer,” Arezki and Matsumoto write and the pair admit surprise that OPEC kept production high in the face of “unexpectedly strong shale-oil production of 5 million barrels per day [which] contributed to the global supply glut” and precipitated the oil price collapse which began in the middle of 2014.
They highlight that while there has been a big drop in investment in the oil industry since then, the game-changing nature of shale oil production, the technology which has lowered costs for producers, and the “fracklog – drilled but uncompleted wells” means that shale oil is both more competitively priced and can be in production “in a matter of week” changes the dynamics of the supply side of the oil market.
It one of the reasons those who believe an OPEC deal will be stitched up at the end of November meeting expect a price move into the $55/$60 region, not a run back toward $80 or higher.
Too much production can simply find its way onto market too quickly to make oil prices move sustainably through these levels given current inventory levels and global demand.
On demand, Arezki and Matsumoto say:
“A sizable share of oil demand growth is attributable to the price drop rather than income gains. With limited scope for further declines in prices in dollar terms, increases in oil demand will depend largely on prospects for global economic growth.”
And that they said means the “outlook for demand growth isn’t encouraging”.
Equally, “over the medium to long run, the transition away from oil and other fossil fuels further clouds the outlook for oil demand albeit lower prices may delay the transition”, the pair say.
In the end the pair come down on the side of futures market prices which have oil rising but not accelerating to much higher prices.
“Turmoil in financial markets, plus a strong dollar, has put downward pressure on oil prices,” they write.
“These trends, along with the secular drop in petroleum consumption in advanced economies and the growth of shale, all point to a ‘lower for longer’ scenario for oil prices.”