US$60 oil seen as likely for foreseeable future

Jamaica can expect oil prices to trend towards US$60 a barrel and remain there for the foreseeable future, according to Fadel Gheit, managing director at Oppenheimer & Company Inc.

Gheit said that the growth in US shale oil production and record production by the members of OPEC, led by Saudi Arabia, has significantly reduced the returns to the sector.

As a consequence, the sector will seek to go from its current state of break-even at about US$50 a barrel to making an economic return, but not far beyond that level.

"US$30 oil is not sustainable. US$100 oil is not sustainable. US$60 oil is the new normal," said Gheit in a speech at the Jamaica Securities Dealers Association's Energy and Commodities Breakfast Forum in New Kingston on Tuesday.

Shale or claylike rock that generates oil and gas changed the energy outlook, creating the 'shale revolution'. The US extraction of shale remains the most cost-effective when compared with shale in China or even shale in Saudi Arabia, based on a large availability of water and technology.

Gheit said that the shale revolution added resources to the global supply, yet OPEC denied its relevance by "putting their heads in the sand".

Oil nearly hit US$140 a barrel back in mid-2008 then tumbled by December of that same year to about US$36 a barrel. Prices eventually rose then hovered around US$90 to US$110 in subsequent years but tumbled again in mid-2014. Oil hit a low of some US$27 a barrel back in February 2016 and now prices are hovering at US$49 a barrel.

Gheit added that Saudi Arabia's intention to sell 5.0 per cent of its national oil company Aramco on US exchanges in 2018 would create the largest ever initial public offer, but should be viewed as a signal of the value that Saudi Arabia, the world's largest oil exporter, places on its own oil.

"The timing indicates that the Kingdom does not see oil prices going much higher than US$60 a barrel, posing risk for high-cost producers," he said.

Gheit added that if oil goes to US$100 a barrel, it would result in a slew of new entrants in traditional and shale oil production which would create renewed upheaval in the sector.

"The US has replaced Saudi Arabia as the world's swing producer. Barring supply disruptions, US$60 a barrel could be the new normal, which forces capital discipline, generates attractive returns and accelerates industry consolidation," he said.

Forty years ago, many industry experts were concerned by 'peak oil', the theories around which suggested that by the year 2000 supply constraints would push oil beyond US$100 a barrel, with expected grim consequences. Those price levels were breached, but now the shale revolution and independent actions of Saudi Arabia, as the major OPEC member nation, has resulted in increased supplies.

"The grim predictions never materialised as, despite rising oil demand, global reserves continued to grow even faster to record levels, driven mainly by new technologies, including horizontal drilling and hydraulic fracturing, boosted recovery rates and added new reserves," Gheit said. He added later that a return to triple-digit oil prices is unlikely for now.

steven.jackson@gleanerjm.com