When the major oil-producing countries meet in a month’s time at a Vienna hotel, they are expected to extend the production cap that has pushed up the price of oil in recent months.
The agreement in December by Opec and Russia to curb production for the first half of 2017 has driven oil prices up near $55 a barrel, offering some respite for an industry hit by a slump in which prices fell as low as $27.
Producers have largely stuck to the deal of cutting output by 1.8m barrels a day, with Opec hailing a 98% conformity rate as a sign of “significant willingness to continue cooperation”.
The big question is whether those curbs will be extended for a further three to six months, to prop up prices. It is hard to imagine they won’t – key player Saudi Arabia has signalled an extension is on the cards, and analysts have warned failure to do so could see prices sink back down to $40 a barrel.
While a lower price would be welcome news for motorists filling up their cars, it could hit overdue investment decisions by oil companies. (BP, for instance, said earlier this year that it needs a relatively high price of $60 a barrel to break even.) The UK industry would be less likely to get the “urgent” new capital it seeks to fill the hole left by low investment in the North Sea.
Cheaper oil would also put even greater pressure on oil-reliant governments struggling with budgets and restless populations. As the International Energy Agency said last week, there are “heightened geopolitical risks in some major [oil] producer countries, such as Venezuela”.
The IEA spelled out quite how bad the last two years have been. Global oil discoveries were at a record low in 2016, at 2.4bn barrels compared with an average 9bn barrels over the past 15 years, and the number of projects sanctioned by companies was at a 70-year low. Both trends could continue this year, it warned.
One bright spot, depending on your point of view, has been the US. Output is up, and costs are down. There were 857 rigs in operation this month, more than double the amount a year before.
As the IEA noted: “Growth in US shale production has become a fundamental factor in balancing low activity in the conventional oil industry.” It is also a fundamental factor in why Opec wants to continue curbing production.
Whatever happens at Vienna in May, the long-term picture for oil firms and major oil-producing countries is grim, according to a new book. Burn Out: The Endgame for Fossil Fuels takes the view that oil prices will not just be “lower for longer”, as BP chief Bob Dudley predicted, but lower forever. The evidence for author Dieter Helm’s case rests on plentiful supply unlocked largely by the US shale revolution, “unstoppable” global action on climate change, and technological advances.
“My view is that oil prices will probably carry on falling forever, and $50 is a high price for oil, not low,” the University of Oxford professor told an audience in London last week.
Helm described his book as “very bleak” about the fate of the Middle East’s oil producers, who he warns face challenges “at best uncomfortable and at worst close to existential”.
Of Opec, he writes: “The popular narrative … assumes that these countries still have the power to move the price, and hence assumes that, eventually, Opec will restore order and return to the good days of ever-higher prices. This narrative is profoundly wrong.”
However, Helm is bullish on the US. Donald Trump is a “very lucky president in energy terms”, because Barack Obama was “the fossil fuel president” who oversaw a huge increase in oil and gas production and set the country on course to energy independence.
On the fundamentals, Helm makes sense. But judging from the cautiously upbeat results presentations of oil and gas giants in recent months, the industry looks unlikely to buy what he see as their best option: “harvest and exit”.
Draghi’s inflation assurance is uplifting news for Macron
Europeans jetting off en masse at Easter helped boost holiday prices, and therefore inflation, across the eurozone this month.
But Mario Draghi, the head of the European Central Bank, ignored the surge in an inflation rate of 1.9% and a rise in core inflation (which strips out energy prices) to 1.2%, which was the highest level since June 2013. Draghi seems to think this much-needed increase in prices – which staves off the threat of deflation across the single currency bloc – is not here to stay.
His judgment appeared to be that nonexistent wage growth and low oil prices would push inflation back down again. At the ECB’s monthly meeting, he stressed that underlying inflation remained low and GDP growth steady. The signs of a stronger global recovery and increasing trade suggested foreign demand should add to the economic resilience of the euro area, he added.
This will, of course, agitate Germany. Berlin will demand that Draghi starts to withdraw the ECB’s monthly injections of central bank funds – or quantitative easing – which Berlin says is pushing inflation up to intolerable levels.
But Draghi was having none of it. He insisted that it was too early to withdraw stimulus. At the moment, the 19-member currency bloc is enjoying a goldilocks period that cannot risk being derailed by higher interest rates.
Not that Draghi was complacent. With a nod to upcoming elections in France and Germany and possibly the austerity hitting Poland, Hungary and Romania, he said it would be a mistake to ignore growing social unease. It was clear that globalisation had “extraordinary benefits”, he explained, but “it also created losers”. There should be greater social consideration for those who did not benefit, or lose out, he concluded.
With a French election looming, it is a message that could excite Marine Le Pen’s supporters and give Emmanuel Macron, her euro-loving rival, a jolt. But the message of steady growth under the stewardship of the euro-elite was the central theme, which gives implicit support to Macron’s stance. Maybe that was the point.
M&S’s online trial could make a basket case of Ocado
Ocado’s board will not be surprised that Marks & Spencer is moving into its territory by experimenting with online delivery. Ocado’s chairman, Lord Rose, a former chief executive and then chairman of M&S, predicted as long ago as 2013 that his old employer would eventually have to offer a delivery service to meet demand from customers.
But Ocado surely won’t welcome M&S’s experiment. Its normal view of online competition is that it all helps to popularise delivery, which works to its advantage over time. But M&S’s arrival may signal something different.
M&S is really trying to convert its convenience-first store format to the online world. The economics look tricky for the retailer but Amazon, via its Fresh offer, is trying the same trick. If small basket sizes become popular online – just as they have in the bricks-and-mortar world – that spells trouble. Ocado is set up to deliver £100-plus orders. An M&S delivering £50 orders twice as often could be a serious threat.
