Spring is coming in the oil market. That was the message from the heads of the world’s largest trading houses at the FT’s commodities conference in Lausanne this week. The overwhelming consensus among these influential figures in the market is that crude is unlikely to return to the prices below $30 per barrel that it reached in January, and the trend is now upwards.
The markets do seem to support that interpretation. After a 4 per cent jump on Tuesday, internationally traded Brent crude is almost 60 per cent above its low point in January.
Even now, prices of about $44 per barrel are still below the level that most people in the oil industry would consider sustainable for the long term, so it is certainly plausible to think that the correction is now under way.
Before oil producers start planning for happier days, though, there are a couple of more gloomy points that they need to consider.
First, there are good reasons to think that oil prices could go down again in the short term. And second, even if the longer term trend is upwards, it will be hard to see a return to the prices of about $100 per barrel that seemed normal only two years ago.
One immediate spur to prices has been the prospect of the meeting of oil-producing countries, including Russia and most members of Opec, in Doha on Sunday. Several countries have been talking up the prospect that they will confirm the “freeze” in oil production that was provisionally agreed by Russia and Saudi Arabia in February, signalling to the market that the excess supply that has been driving down prices will soon disappear.
But when Igor Sechin, chairman of the Russian state-controlled oil group Rosneft, told the FT conference that “everyone is expecting the successful outcome of our work” in Doha, he was indulging in wishful thinking.
For some countries, including Russia, promising not to increase production will merely confirm what they were doing anyway. Others are showing less than resolute commitment to solidarity with other producers. Iraq is rapidly increasing production before the freeze, while Iran has said it will not join in any deal and plans to continue raising its output.
Regardless of what is said at Doha, the global oil market is likely to remain oversupplied for a while.
We have been here before, exactly a year ago. After the steep crash from the summer of 2014, oil rebounded from January to April 2015, and held on over $60 for some time. It looked then as though the worst had passed, too. But in July the oversupply started weighing on the market again, and another leg down in prices began.
Since then, the US shale industry has been battling to cut costs and raise productivity so it can survive at lower prices.
The shale industry, which was largely responsible for the oil crash in the first place because of the production boom that began in 2010, has been mauled by lower prices, but its output has not collapsed as many analysts expected, and the principal producers are still in business. Even heavily indebted Chesapeake Energy, seen as one of the most vulnerable, this week managed to secure its future for a while longer with a renegotiated $4bn bank lending facility.
The US shale industry does not work with oil at $40, but at $50 and certainly at $60, companies say they can drill plenty more wells that would be financially viable. Once oil starts returning to those levels, we can expect to see more drilling and more production from the US, in effect putting a ceiling on prices.
Nothing lasts forever in commodity markets and it is quite possible that rising demand will eventually push crude back above $100 again. But while the worst may now be over for oil producers, those halcyon days of two years ago are likely for the foreseeable future to remain a golden memory.