HOUSTON (Reuters) - As oil
prices entered a second steep slide a few weeks ago, bullish traders and
analysts had hoped for a repeat of the sharp but short dip that
occurred early in the year - a speculative slide below $50 a barrel
followed by a quick recovery.
Some are now reconsidering that
view, as long-term oil prices take the lead in the market's latest dive,
swaying sentiment toward a lengthier slump that would mean prolonged
pain for big producers, from Exxon Mobil Corp to Saudi Arabia.
While
immediate delivery benchmark global Brent crude oil futures at $50 a
barrel are still about $4 higher than they were at their lowest point in
January, prices for delivery in December 2020 are nearly $8 lower than
the start of this year, trading at a contract low of less than $67 on
Tuesday. A year ago the contract hovered at around $100 a barrel.
The reason for the deterioration of the forward curve and decline in "long-dated" futures is a subject of debate.
But
even some who disagree with the fundamental logic of lower long-dated
prices are coming round to the scenario that prices will be lower for
longer.
"The back of the market has led prices lower as
speculators are no longer convinced higher oil prices are required to
balance future oil supply and demand," consultants PIRA Energy Group,
which called last year's price slide but has also predicted a sharp
rebound, wrote in a note this week.
The firm does not make its specific forecasts public.
"PIRA
disagrees with this view, but a 'show me' mindset regarding tightening
balances will keep prices lower than forecast earlier."
Some
believe the recent selloff was fueled by speculators fleeing the market
amid collapsing confidence after China's stock market crash, and
exacerbated by a lack of liquidity and resumption of hedging by
producers including Mexico, which sell futures to guard against lower
prices.
"The decline in calendar year 2016 prices has been
overstated, in our view," analysts at Barclays wrote this week. "Fundamental tightening, demand and stock revisions, and current
positioning are likely to raise prices in the months ahead."
Others
say it stems from more deeply rooted fundamental factors, such as
falling production costs in the U.S. shale patch and expectations of
rising exports from Iran next year following a landmark nuclear
agreement - and if so, far forward prices may be flashing warning lights
for the future.
A NEW EQUILIBRIUM?
The retreat in
long-term oil prices commenced in the latter part of last year, when
Saudi Arabia made clear it would no longer cut production in order to
tighten up sloppy markets.
Absent the kingdom's implicit promise
to defend prices, the value of Brent crude oil for five years in the
future slid from nearly $90 a barrel in late November to around $72
almost two months later.
Over the past month, however, it has dived anew, reaching nearly $66 a barrel on Tuesday, its lowest since 2009.
Last
week, analysts at ABN AMRO cut its 2016 oil price forecasts by $10 a
barrel on a mix of factors including falling production costs,
disappointing demand, a stronger U.S. dollar and deteriorating market
sentiment.
"What we see is that the U-shape recovery which we
still expect for oil prices will take longer to materialize," Senior
Energy Economist Hans van Cleef told the Reuters Global Oil Forum last
week.
The question for oil executives, traders and analysts is
whether this represents a new equilibrium for the market - a price high
enough to encourage just enough new production in the future to meet
demand, which continues to grow.
Standard
Chartered's Paul Horsnell, one of the most bullish forecasters in
Reuters monthly poll with a projection for $93 Brent in 2017, says no -
long-dated prices are too low, although the latest slide may signal a
deferred recovery.
"Is this a
market transitioning from a view of an inevitable bounce in 2016 to
adding another year onto the rebound? We just don't know yet," said
Horsnell.
And while some big
companies such as BP Plc and Royal Dutch Shell Plc are preparing
investors for a more extended downturn, some are still signaling
cautious optimism.
U.S.-focused
Anadarko Petroleum Corp, for instance, is opting not to pursue an
"aggressive" approach to completing shale wells that have been drilled
but not yet hydraulically fractured.
Completing
wells more quickly is "an option we might choose to pursue if we
thought the current environment was going to be protracted and we were
somehow in a new normal, $50-esque oil environment," Chief Financial
Officer Bob Gwin told analysts last week.
"We don't believe that's true over the intermediate to longer term."
(Reporting by Jonathan Leff; Editing by Lisa Shumaker)
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