SINGAPORE: Oil’s race towards $70 a barrel in the last few months has stirred a debate on whether prices have run ahead of fundamentals, or if the market has bottomed and the time is now for a comeback in investments.
Near-term overcapacity, relatively lower oil prices and caution in committing to new large-scale refining and upstream projects have also prompted concerns of under-investment that will lead to future oil price spikes.
‘The key issue facing the industry is trying to understand future demand and trying to balance that against investments,’ Simon Littlewood, president of consultancy Asia Now, said.
These concerns, which run parallel to discussions on whether the global economy is emerging from the slump, and the changing landscape faced by oil companies, would be the focus of this year’s Asia Oil & Gas Conference (AOGC) in Kuala Lumpur next week.
Oil, which hit a peak above $147 a barrel last July, fell to near five-year lows below $33 in December but has since rebounded toward $70 on Friday, riding piggyback on an equities rally.
Yet, some analysts caution that oil supply and demand fundamentals do not justify recent crude price gains — up 30 per cent in May alone.
‘The horse is out of the stable again. Prices have charged to $70 for no good reason whatsoever… with spare OPEC capacity at 7.5 million barrels per day, there’s absolutely no reason for such a move to the upside,’ said John Russel, a consultant with KBC Market Service in Singapore.
The rally may jeopardise a wider economic recovery, Executive Director Nobuo Tanaka, the head of International Energy Agency, told Reuters on Friday.
‘If the economy is not recovering but the price is going up, it makes for a very bad, negative implication,’ he said.
Tanaka, who will also address the AOGC, expects a one-fifth reduction in oil industry investment this year, a pattern that could eventually lead to a supply crunch by 2015, a concern shared by the chief of Royal Dutch Shell.
‘If the oil prices stay volatile, I’m afraid there will be too much slowdown in investment,’ said Chief Executive Jeroen van der Veer, who will give a keynote speech at next week’s conference.
‘I think too low capacity means the next price spike is to come,’ he said at a conference in Abu Dhabi.
Still, some industry players are starting to cast aside last year’s pain and pushing on with expansion plans.
‘There are people who have cash. These people are looking for the bottom so they can invest,’ Asia Now’s Littlewood said.
‘Once it looks like the bottom is there, a lot of cash is going to come back to the market.’ The state of the oil marketplace, including trading volumes, strategies in the current environment, lingering credit issues and aversion to risks, would also be of concern.
Market activity dried up late last year, when volatile oil prices, tight credit financing and a plunge in real demand combined to squeeze trade volumes to a trickle. But trading appetite has since returned as the trends attempt a reversal.
With oil prices tumbling off records and recovering since the start of the year, buyers and sellers of liquefied natural gas (LNG) are likely to debate the best pricing mode and weigh the merits of having a mix of locking in long-term deals with spot supplies. — Reuters