Baku. 18 May. REPORT.AZ/ You could be forgiven for thinking that oil's recent rally is the start of a drive back towards the $100/barrel prices that were the norm from the end of 2009 through until the July 2014. Brent crude and WTI crude respectively dipped in and around the $50/b and $40/b zones earlier this year, but a sustained rally since early April has taken the global benchmarks to $66/b and $60/b. A return to the stratospheric prices of the 2010-14 period looks unlikely, however, even if both OPEC and the International Energy Agency today projected small rises in demand for 2016.
"A price of $100/b will trigger a huge response from the shale oil industry and this could be one of the reasons why we do not see the price return to $100/b anytime soon," Report informs, Ole Hansen, the Head of commodities strategy at Saxo Bank says.
Hansen says the supply and rule strategy which global oil cartel OPEC embarked upon at its key meeting in November 2014 has certainly worked in the short term. "The OPEC policy of keeping production unchanged to depress the price has worked and we are now seeing US production beginning to slow and non-OPEC investment projects being scaled back," he says. "US shale oil production has risen by more than 1 million barrels/day each year since 2011 and this growth will be sharply reduced following the price slump."
But while that's been a boon for kingpin OPEC producer Saudi Arabia, the strict discipline needed to turn the screw on game-changer shale has been a far tougher line to follow for other members, says Hansen.
There has too been an unforeseen circumstance of OPEC's controversial strategy, and one that might make it much harder for the cartel to manipulate prices in the future.
"The price slump witnessed since last July has seen a dramatic cut in capex but at the same time it has help trigger a much needed round of cost reduction within a sector that had lost focus on cost as the price remain elevated and stable above $100/b for three years," Hansen says.
"Price deflation in the sector has led to comments from EOG, one of the major shale oil companies, that it is now making more money at $65/b compared to what it made at $95/b two years ago."
"At $70/b, most of the US shale oil industry will become profitable again which means that the losers shall be found outside," says Hansen. "The current price level is not far from where production from thousands of drilled but uncompleted wells in the US could resume and this could over time add up towards 500,000 b/d of extra supply."
"Some projects like deep water in Brazil and oil sands in Canada may suffer as these types of extraction still requires a high price," the head of commodities adds.
With WTI - the key benchmark for the US shale sector - approaching $65/b, we could therefore be set for another massive flow of oil onto the market, says Hansen.