Officials from two of the world’s biggest banks warned last week of a “lower for longer scenario” for oil prices.
Speaking at a panel on oil prices in Kuwait, Ed Morse, the global head of commodities research at Citibank, told the audience on Oct. 18 that he expects to see oil prices staying in a range between $40 and $60 per barrel for the coming 10 years.
Morse said there was enough crude in the oil market and that technology was allowing many producers, mainly in North America, to produce crude at a lower cost, thus competing in the low-oil-price environment.
Philippe Khoury, vice chairman of HSBC Bank’s Middle East operations, echoed Morse’s comments at the same panel in Kuwait, adding that he expects oil prices to stay “lower for longer more than what we expect.”
Khoury, who spent 30 years in the oil industry before moving to HSBC, said that the sector is seeing a big shift as a few years ago there was concern about limited availability for oil supplies that gave rise to the peak oil supply theory. Today, he said, the market is more concerned about peak in demand.
OPEC is trying to “mitigate the damages but it is not in the driving seat any more,” Khoury said.
OPEC’s power to control the oil market came from its ability to play the “swing producer role,” which allows it to adjust its production quickly to meet any hike in demand. That role is now shifted to shale oil companies in the US that can add big volumes with little investments, Khoury said.
The US shale oil “miracle” in North America, however, can’t be replicated easily elsewhere as no country has the same infrastructure as the US to support independent producers to bring more crude to the market, Khoury said.
The increase in production from shale oil producers in North America over the past four years played a big role in the fall in oil prices since 2014 as the market saw its worse oil glut since the 1980s. OPEC and Russia are leading the global effort to cut oil output to drain oversupply and support prices.
The current effort of OPEC and Russia to extend the agreement well into 2018 may not lead to a desirable outcome if it is prolonged, said Morse of Citibank.
OPEC and its new allies cannot keep cuts for longer as they would be subsidizing shale oil, deep water, and other high-cost producers, Morse told Bloomberg in an interview on the same day as the panel.
By further extending cuts they would lose incremental gains in revenue over the following two years, he said.
Thanks to OPEC and its allies, oil prices are now at good levels that will allow shale oil producers to increase their production by close to 1 million barrels per day (bpd) next year, Morse said.
US shale oil output will grow by 800,000 bpd in 2018 if WTI prices in New York stay slightly above current levels of $51, said Morse. At $52 for WTI, many US producers can hedge their production next year and bring more supply to the market, he added.
With such a complex situation, OPEC members have no choice but to diversify their economies, a task easier said than done, Morse said.

Source: Arab News