“It depends on what Saudi Arabia sees elsewhere and how rapidly the high OPEC supply affects production in other areas of the world,” Riley expanded.
“The lifting of the oil sanctions on Iran will have an impact, but Saudi Arabia is rational enough to realise that the oil price being in a downward spiral for too long is counterproductive for both them and Iran. We have seen situations in the past where members of OPEC have been at loggerheads but eventually come to a compromise, and I think we will see that again.
He continued: “Fundamentally, $55 a barrel does not produce enough oil to meet world demand and is too low. In the medium-term we should see the oil price recover into the $70-80 range, which should continue to incentivise global oil demand growth, and will allow growth both in the US oil industry and in OPEC and other regions.
“But we also need a price that incentivises oil production globally, such as in Brazil or deep-water West Africa. To make those projects viable the price needs to be $90-plus, and we do expect the price to recover going forward.”
On the other side of the coin, Stanojevic says that even in the unlikely event of a supply/demand rebalancing happening in the short-term, it would take far longer for the impact to be felt in the market.
“Without a significant rise in demand or production cut the price could go lower,” he expanded. “Inventories have been building, and even if supply/demand was balanced today there would be a price ceiling as the sector works through the surplus over six to nine months.
“There is no reason why the spot price will not fall to $40 a barrel in the next six months. In the medium to long-term it should get back to marginal cost of production – $70 to $80 – but the route could be painful. “
So how does this affect the industry’s investment prospects?
