Oil’s new mantra: ‘A lot lower for a lot longer’

The first mantra from the oil crisis was “lower for longer.” Then “lower for even longer.” Now in Davos, oil executives are beginning to speak – in other words, whisper – in regards to a new nightmare scenario: “A great deal lower for a lot longer.”

Oil executives, policy makers and banks said within the first times of the World Economic Forum that a recovery will stay elusive in 2016 as major producers keep pumping and China’s fuel appetite slackens. Plus they fret that prices could take another hit as Iranian crude freed from sanctions flows back on to world markets.

“It is the third year consecutively we’ve more supply than demand,” Fatih Birol, executive director of the International Energy Agency, told Francine Lacqua inside a Bloomberg Television interview. “When we look at the 2016 demand and supply situation, prices is going to be still under pressure. I don’t use whatever reason we have a surprise increase in the price in 2016.”

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Things won’t get better until energy markets have weathered the “supply shock,” said Tony Hayward, chairman of Glencore Plc, one of the world’s largest trading houses. Basically, there’s “an excessive amount of oil,” he explained.

Iran’s return

The end of nuclear-related sanctions on Iran on Jan. 16 has freed the OPEC member – once the group’s second-biggest producer – to bring back crude exports slashed in two by almost four years of restrictions. Impatient to claw back lost revenue, the Persian Gulf nation issued a directive to revive daily output by 500,000 barrels as soon as possible.

“The lifting of Iran sanctions will in my view continue to add supply, so I don’t visit a bottoming-out of oil prices along with a re-spiking in the near future,” said UBS Group AG chairman Axel Weber. Depressed prices give Iran’s rivals, such as OPEC leader Saudi Arabia, even more incentive to keep pumping, he said.

Unprecedented cutbacks in spending on new supply – a 16 per cent investment reduction this season follows last year’s 20 percent decline – is setting the stage for a recovery, but it is going to be 2017 before this materializes, the IEA’s Birol predicts. The size of the spending cuts means the rebound will be all the harder when it comes, based on Crescent Petroleum Co.

“This can have an impact later on, making the cycle more extreme,” Majid Jafar, ceo of U.A.E- based Crescent, said within an interview.

But what level would that recovery take prices to, annually from now? “$50 is really a possibility,” Jafar says.

That’s about 50 % the worth oil was trading at only 18 months ago.

Bloomberg News