Reduced oil prices for an extended period of time is a boon to the rest of the economy. The global oil surplus increasingly looks like a problem that’ll take years rather than months to solve — and the market is pricing that in.
U.S. crude futures for delivery in five years have broken below levels seen during the financial crisis. With leading OPEC members pumping at a record, supplies from elsewhere holding up and Iran close to reviving exports, the market is signaling the glut will persist.
The global oversupply has already prompted oil companies to warn that the price rout will continue. Royal Dutch Shell Plc said Thursday it’s braced for a “prolonged downturn,” echoing a forecast from BP Plc Chief Executive Officer Bob Dudley that prices will stay “lower for longer.”
While investors generally focus on spot prices, forward contracts for delivery in one, two and five years are used by producers and consumers to lock in prices through hedging programs.
West Texas Intermediate contracts for five years ahead settled at $62.77 a barrel on July 27, the lowest on the New York Mercantile Exchange since February 2007. That compares with a four-month low for spot prices.
The WTI one-year forward fell this week to the lowest in six years, settling at $53.17 a barrel on July 27 and approaching the $48.11 low reached during the financial crisis of 2008-09. WTI for September, the most traded contract, closed at $48.52 yesterday.
“Markets always feel the ugliest and the most bearish when prices drop across the curve,” said Mike Wittner, head of oil-market research at Societe Generale SA in New York. “People are thinking the global oil market is going to take longer to rebalance than previously thought, and therefore there’s downward pressure across the curve.”
The weakening of long-term contracts reflects not only growing concern that the glut will persist but also forward selling by oil producers themselves, according to brokers and bankers.
The start of Mexico’s annual program to lock in prices for its production may help explain the falling contracts, Norway’s DNB ASA bank said. The country has begun the hedging operation, which typically amounts to about 200 million barrels and is one of the few such programs undertaken by a national government, for 2016, three people with direct knowledge said this week.
“It’s logical to assume the Mexican hedging program has had a negative influence” as the volumes are so large, said Torbjoern Kjus, an Oslo-based analyst at DNB.
Shale Drillers
One victim of the forward-price slump is the North American oil industry, where hedges secure income for shale drillers. A year ago, they hedged production for 2015 at $85 to $90 a barrel, staving off a cash shortage to boost drilling. Now, they’d have to hedge much lower because of the weakness in 2016 and 2017 contracts, reducing potential revenue.
The outlook for North American output growth looks less promising next year, said Olivier Jakob, head of consultant Petromatrix GmbH, citing sliding forward contracts. “The current price-structure environment is less favorable than earlier in the year for hedging forward production.”
Source: news.stv.tv