Oil price rebound can’t last: Olive
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May 19, 2015  |  Vote 0    0

Oil price rebound can’t last: Olive

The oil glut that began last year has a continued long run ahead of it. That’s good news for consumers, of course

OurWindsor.Ca

Don’t be misled by the recent recovery in global oil prices, and the boon that would be, if the recovery was sustained, for an Alberta oilpatch devastated by the world-price plunge that began last year.

Alberta housing prices have been on the rebound in recent weeks as the global oil price has surged by about 50 per cent since January. Saudi Arabia claimed last week that it has been victorious in its price war with the upstart U.S. shale-oil producers.

The Iranian oil minister, sounding ebullient, has proclaimed that world price will return to $80-per-barrel (U.S.) in 2017.

Hold on.

A return to $80 oil would still be almost half the 2008 peak price of $147.50.

And 2017 is two years away, during which the investment famine in Athabasca will continue. And anything can happen in the next two years, unpredictable events that might have the opposite effect of those that have brought about the recent oil-price recovery.

The real story is that very few experts believe the current recovery is sustainable. Among the naysayers on an imminent return to buoyant times for world oil producers is Rex Tillerson, who should know.

The CEO of Exxon Mobil Corp., the world’s largest private-sector oil and gas producer, anticipates what he describes as a “W-shaped” recovery rather than the usual post-crisis “V-shaped” recovery.

Which is to say a double-dip. The oil price has plunged, it is currently recovering, but it will dip again – hence the “W” – before a sustained recovery gets underway.

Fact is, the world is still awash with oil. The Saudis, long counted on to curb production to boost prices in times of slumps, instead continue to produce flat out in order to drive the U.S. shale producers, with their higher production costs, out of business.

The U.S. shale producers, for their part, are emboldened by the recent price upturn to resume production at their previous peak levels, if only to recover their heavy up-front investment costs.

Bottom line: the oil glut that began last year has a continued long run ahead of it.

That’s good news for consumers, of course.

Mark Carney, former governor of the Bank of Canada and current governor of the Bank of England, said last week that the combination of U.K. supermarket price wars and the weak oil price have kept inflation so minimal that his big fear is deflation.

This week, oil prices have already entered another phase of downward pressure. That was to be expected, because lower oil prices are very likely here to stay.

On Victoria Day, Goldman Sachs Group Inc. revised its oil-price forecast south, citing continued massive production among Middle East producers.

Upheaval in the Mideast, notably the horrific genocide perpetrated by Islamic State in Syria and Iraq, has, contrary to expectations, had only a brief impact in raising expectations about a return to high oil prices.

Fact is, neither Iraq nor Syria (the latter has never been a major producer) figure into global oil pricing, and commodity traders were wrong to think they do or might.

Acknowledging the undeniable impact of Islamic State on Iraq’s diminished oil production, Richard Mallinson asserts that “In the short term, supply risks don’t look higher than before.”

The geopolitical analyst at Energy Aspects in London said, “The market is still over-supplied, and if prices go much higher in the U.S. we could start to see some drilling returning, which would slow down the rebalancing process.”

“Rebalancing” is fancy talk for a return to lofty wellhead and pump prices.

What Mallinson states in a speculative way is actually happening. And was bound to.

The crazy notion that U.S. shale producers would throw in the towel permanently under pressure from the Saudis – another mistaken belief behind the recent oil-price recovery – was a fool’s dream.

Exxon Mobil, to cite just one example, didn’t spend about $5 billion acquiring America’s largest shale-oil producer a few years back with the idea of shutting its wells indefinitely.

America is understandably pleased with its newfound self-sufficiency in oil, which the Yanks are actually exporting for the first time in memory.

Which means U.S. shale producers will be back in full production sooner than later, with a dampening effect on world prices.

Newly elected Alberta Premier Rachel Notley is committed to diversifying the Alberta economy, something that 86 per cent of Albertans polled in April highly favour. But the time to get started on that was way back when then-premier Peter Lougheed was exhorting Alberta to do so.

A recent oil-price recovery that turns out not to have legs means Alberta will remain in budgetary extremis for some time to come. And that the mild froth in housing prices in Calgary, Edmonton and Fort McMurray may result in buyers’ remorse, at least in the mid-term.

Toronto Star

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