As most of the world focuses on how unfettered oil production will weigh on prices, a few say a rebound is on the cards as the market starts to reflect a growing risk of shortages.
OPEC’s strategy of keeping its taps open is leaving a smaller cushion if there’s an unexpected need for more oil. The group’s spare capacity has dwindled to the least since 2008, U.S. government data show, while global spending cuts have diminished prospects for new output.
Crude may jump more than 35 percent from current levels as the possibility of a supply squeeze begins to get priced in, according to Citigroup Inc.and trader Gunvor Group.
The biggest energy crash in a generation prompted the industry to cut $1 trillion in spending. That’s resulted in less new production and the slowing of current output as firms scrimp on technology that lengthens the life of fields. Citigroup sees prices rising to $65 next year, while Gunvor envisions an advance to as much as $70, levels last seen in 2014.
“The move from $50 to $60 to $70 a barrel could be a lot quicker than people think,” David Fyfe,Gunvor’s head of market research and analysis, said in an interview in Singapore. “Everyone in the supply universe apart from Saudi Arabia is, over the short term, producing as much as they can. There’s no one apart from Saudi Arabia, which has between 1 and 2 million barrels a day of spare capacity.”
Members of the Organization of Petroleum Exporting Countries had about 1.1 million barrels a day of spare production capacity last month,the U.S. Energy Department estimates, compared with more than 4 million in late 2010.
In 2011, after unrest in Libya cut output in that nation by about 1.5 million barrels a day, OPEC members tapped into spare capacity as oil prices shot up above $120 a barrel. Angola pumped more that summer, while Saudi Arabia increased its own production by 1.35 million barrels a day.
While producers try to extract what they can from underground, supplies stored on land are ample. Global petroleum stockpiles rose to 3.1 billion barrels in June, about 360 million above the average of the previous five years, according to the International Energy Agency.
A price spike would require demand growth to be strong enough to overwhelm daily supply and eat into those inventories. The IEA on Tuesday said it doesn’t see that happening until at least 2018 as growth in consumption falters and output proves resilient.
Still, while inventories are depressing prices as they remove the fear of scarcity, buyers probably shouldn’t feel so secure, Seth Kleinman, global head of energy strategy for Citigroup, said in an interview in Singapore.
Stockpiles grew as OPEC reduced spare capacity and pumped at record levels. The increase in supply is effectively a transfer of oil stored in reservoirs below OPEC countries to crude stored in tanks above ground, according to Kleinman, who said that the combination of factors could push prices to $65 a barrel next year.
Read more of the original article at The Detroit News.
