SHELL'S PRICES OPTIMISM
The global oil market will rebalance later this year, paving the way for a recovery in crude prices from their lowest level in more than a decade, according to Royal Dutch Shell's chief executive.
Striking a bullish stance as the Anglo-Dutch oil company reported an 80 per cent slide in profits last year, Ben van Beurden argued on Thursday that the "unprecedented" volatility in oil prices did not reflect fundamental supply and demand.
"Can oil prices go lower? I'm sure they can. Will they go lower? I don't know," Mr van Beurden told reporters in a conference call. "If you look over the slightly longer run, you are not going to see structurally lower oil prices in the $30s."
His comments echoed remarks on Tuesday by BP chief executive Bob Dudley, and highlight a hardening view among some senior industry managers that the latest sell-off in crude, which took internationally traded Brent to 12-year lows of below $30 a barrel, has gone too far.
"We will probably see a balancing in the market later this year, maybe early next year," said Mr van Beurden.
For BP and Shell, desperately cutting costs to shore up cash flow and safeguard dividends, the timing and strength of any rebound matters.
Mr van Beurden said in November that Shell's planned £36.7bn takeover of BG Group, the largest energy deal in more than a decade, works with Brent in the "low $60s". The intention was to reassure investors that dividend payouts were safe. They still are, Mr van Beurden said on Thursday. But right now, after another lurch downwards in oil prices, it looks a long way back to $60.
Moreover, not every oil company shares Mr van Beurden's optimism. Ryan Lance, chief executive of ConocoPhillips, said on Thursday "we don't know how far commodity prices will fall, or the duration of the downturn". He added it was "prudent to plan for lower prices for a longer period of time."
Conoco cut its quarterly dividend by 66 per cent as the US oil producer reported a $3.5bn net loss for the fourth quarter of 2015. Statoil offered shareholders a scrip dividend to try to conserve cash, as the Norwegian group reported a fourth quarter net loss of NKr9.2bn ($1.1bn).
Shell's results, which showed full-year profits on a current cost of supplies basis falling from $19bn in 2014 to $3.8bn last year, contained no new cuts to capital spending or job losses, of which 2,800 are planned. Shell has cancelled billions of dollars of spending on projects, including ditching a fruitless exploration campaign in the Arctic.
Fourth-quarter earnings excluding identified items, analysts' preferred profits measure, fell 44 per cent to $1.8bn.
Shell, as Mr van Beurden put it, still has levers to pull. For instance, its relatively low gearing, or ratio of net debt to equity, means it can safely borrow more to cover the dividend. The company's shares closed up 6.1 per cent at £15.25.
Shell and BP could be right on prices. Mr Dudley said global supply growth was starting to level off, especially in the US, where output has been falling. While America's shale producers have proved more robust in the face of falling prices than many expected, crude output has slipped from 9.6m barrels a day last July to 9.2m b/d in January.
Some investors are turning more bullish, too. Hedge funds that had helped build a near-record bet against oil at the beginning of the year cut wagers on falling Brent prices by a quarter last week, data from the Intercontinental Exchange show.
But others believe any optimism is misplaced. Unless US output falls sharply, or there is a deal between Opec and non-Opec producers such as Russia to cut production, the market will stay oversupplied through 2016, according to analysts.
Indeed, some Opec members have been pumping at record levels, anxious not to cede share to Iran, as it resumes crude exports following the lifting of sanctions. The cartel's output has risen over 1m b/d since November 2014 when it took the historic decision not to support prices by cutting production.
"The numbers show the market is oversupplied," said David Hufton, chief executive of PVM, a London-based brokerage.
Surveys suggest Opec pumped 32.6m barrels a day in January, about 1m more than bodies including the US Energy Information Administration and International Energy Agency estimate the cartel will need to supply in 2016.
If production remains at that level and Iran can hit its targeted output growth of 500,000 b/d swiftly, the glut will grow. Demand has been stronger, but bodies including the International Monetary Fund are now warning of slower global economic growth.
"A reasonable working estimate is that oil supply will exceed demand by 1.5m b/d this year," said Mr Hufton. If so, prices are likely to stay depressed, say traders, and oil could chalk up a third consecutive year of falling prices.
This is what the futures market is suggesting. The current forward curve gives oil an average price of about $37 a barrel for 2016, down another third on 2015. Oil companies' results for this year could make bleaker reading than those for 2015.
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