A year after oil sank into a bear market, the industry is still hunkering down for a long period of low prices, with Europe’s biggest producer seeing only the first glimpses of a recovery.
In the past five months, U.S. production sank by 590,000 barrels a day, or more than 6 percent. The bad news: Drillers are cutting costs with a speed and brutality not seen in decades, enabling many oil producers to maintain output even as prices remain low. Goldman Sachs Group Inc. sees crude falling a further $10 a barrel as storage tanks fill up in the coming months.
Royal Dutch Shell Plc is planning for a long stretch of low prices, Chief Executive Officer Ben Van Beurden said at the Oil & Money conference in London. While he sees “the first mixed signs for recovery,” the resilience of the U.S. shale industry and ample stockpiles suggest it’ll take more time to rebalance demand and supply, the CEO said.
West Texas Intermediate crude, the U.S. benchmark, slumped by almost half in the past year and traded at $48.12 a barrel at 11:54 a.m. in New York on Wednesday. The world has been awash with crude since the Organization of Petroleum Exporting Countries decided last November not to reduce output, focusing instead on protecting its market share from rising shale supplies.
“We see some light at the end of the tunnel,” OPEC Secretary-General Abdalla Salem El-Badri said at the conference. With industry spending cuts totaling $130 billion, the market is now improving and prices may rise in the coming months, yet the supply overhang means the current situation could last as long as two years, he said.
Total SA, France’s largest oil producer, said the industry continues to endure “challenging” times amid volatile prices. Nevertheless, the company’s traders expect demand growth of 1.8 million barrels a day this year, beating the International Energy Agency’s forecast of 1.7 million barrels a day, Total’s President of Refining and Chemicals Philippe Sauquet said at the summit.
Oil companies worldwide will cut investments in oil exploration and production by a record 20 percent this year, which will eventually reduce or eliminate oversupply, IEA Executive Director Fatih Birol said. The industry will defer more major projects again next year, according to Ali Moshiri, Chevron Corp.’s president of exploration and production in Latin America and Africa.
Cutbacks may be particularly noticeable in the U.S. shale industry, according to Mark Papa, a partner at private-equity firm Riverstone Holdings LLC. A price of $45 a barrel is too low to spur shale producers to invest in new production, according to the man who built EOG Resources Inc. into the biggest U.S. shale producer as CEO from 1999 to 2013. “We are about to see a pretty dramatic decline in U.S. production growth,” Papa said.
The world saw the first signs of reduced oil output in May and June, according to Shell’s Van Beurden. “This could entail higher prices, if OPEC at the same time can come to an agreement on how to accommodate the aspirations of Iraq and Iran, in particular, to grow their oil production,” he said.
Iran is preparing to bounce back from sanctions that choked off investment in its oil and gas industry. Successful implementation of a July deal to curb its nuclear program would allow the country to ramp up production. The nation will pump 4 million barrels a day within a year of the end of sanctions, said Mehdi Hosseini, the chairman of Iran’s oil contracts restructuring committee. It produced 2.8 million barrels a day last month, according to data compiled by Bloomberg.
Iraq boosted crude production last month by 17 percent from a year earlier to 3.9 million barrels a day, according to Oil Minister Adel Abdul Mahdi. OPEC has pumped more than its 30 million-barrel daily output quota for 16 months, data on Bloomberg show.
Additional output from OPEC members Libya, Saudi Arabia and Kuwait may also swell global supplies, according to Jeff Currie, head of commodities research at Goldman Sachs.
“Our baseline forecast is for $45 with a trough of $38 during the autumn,” he said Tuesday. The bank said last month that prices may even fall as low as $20. “What’s driving that trough, and what was the genesis of our $20 scenario, is essentially blowing out storage capacity,” Currie said.
U.S. crude stockpiles were already about 100 million barrels above the five-year average even after the nation’s production fell 5 percent from a peak of 9.6 million barrels a day in June. They expanded by 3 million barrels last week, adding to a gain of 4 million in the prior period, according to EIA data. Total inventories in rich industrialized countries were a record 2.9 billion barrels in July and preliminary data suggest they rose again in August, according to the IEA.
OPEC alone can’t clear this surplus because it was created by producers outside the group, El-Badri said.
The supply adjustment involving canceled projects, idled drilling rigs and fired workers has some way to run and more pain to inflict on the industry. Companies have already made the deepest cost cuts in 16 years, said Bernard Duroc-Danner, CEO of Weatherford International Plc, the world’s fourth-largest oil- services provider.
“The brutality of the cost side, I haven’t seen anything like that since perhaps 1999,” he said. “Although North America took the brunt of the pain, the pain is spreading internationally fast.”