Oil price posts two-year highs - but how long can it last?

Plunging oil prices pushes producers to the brink

17 August

Plunging oil prices have stretched the finances of producer nations and pushed several to the brink of collapse, with little sign of a change in fortunes on the horizon.

CNN Money reports that Russia's rouble hit a six-month intraday low against the dollar on Monday before recovering slightly. The currency has dropped 44.8 per cent against the dollar in the last year and 12 per cent in the last month, contributing to rapant inflation which topped 16 per cent in July, and the oil price is at least partly responsible

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The economy is struggling with the effects of cheap oil, which accounts for around half of government revenues, combined with Western sanctions, which have pushed Russia back into recession and left output 4.6 per cent down in the second quarter, the fastest slowdown since the financial crisis.

Russia's budget is based on the assumption it could sell its oil for $50 per barrel or more. International Brent crude remains below this threshold as it continues a renewed decline, while US crude is hovering at a six-year low of around $42. Reuters notes ongoing oversupply concerns have pushed prices down four per cent and ten per cent in the past week.

Other countries have been even worse hit. The Times says Venezuela and Nigeria are on the brink of bankruptcy, while Gulf states are having to prop up revenues from cash reserves as they maintain excessive exports to hold on to market share. Saudi Arabia took $74bn (£47bn) out of its foreign reserves between the end of September 2014 and June 2015, prompting the country to tap debt markets for the first time in eight years last week to bolster its remaining $672bn cash pile.

And things may get worse before they get better. Iran continues to claim it could ramp up production quickly as and when sanctions are lifted later this year, pushing Opec output to new record levels despite already being in excess of demand.

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Oil price: North Sea 'armada' fuels oversupply fear

13 August

North Sea oil production increased for the second consecutive year for the first time in a decade and a half, according the world's energy watchdog.

The International Energy Agency (IEA) warns an "armada" of tankers is adding to chronic oversupply that is dragging down prices.

Bloomberg reports output from North Sea rigs "is defying the doomsayers" who had said it would become a victim of lower prices, with production set to hit three million barrels a day this year, according to latest IEA figures. "The impact will be felt across the world because the North Sea – home of the Brent benchmark – plays an outsized role in the oil market" and even small gains "can move prices significantly".

IEA's report said the region’s benchmark crude prices dropped to the lowest level in more than six years in June, "with as many as seven tankers loaded with unsold crude floating in the North Sea". A further 40 cargoes for August trade at a discount "amid a lack of demand from Asian buyers".

The Times notes this is just one part of a market growing production at "breakneck speed" as various regional players jostle for position. It said lower costs at the pump would encourage demand this year and next but that stockpiles would increase until late 2016 – and "the glut could last even longer if Iran rapidly boosts output after the removal of trade sanctions".

Brent crude actually rose on Wednesday and closed back above $50 a barrel, after the IEA reported US stockpiles are falling and increased its short-term demand outlook.

But Daniel Ang, investment analyst at Phillip Futures, is quoted in the Wall Street Journal saying the supply imbalance was creating "bearish momentum" that "is still extremely strong". He therefore remains "worried" the multi-year low of $45 a barrel reached in January could be breached again before the end of the year.

Oil price: call for tax rises to 'reform' pricing

11 August

A Harvard economist and former adviser to Bill Clinton has called on governments around the world to use the current trough in oil prices to "reform" their tax regimes and end indirect subsidies that stoke demand for polluting fossil fuels.

Writing in The Guardian Jeffrey Frankel, a professor at Harvard's Kennedy School of Government who served as an adviser to President Clinton, says that while the oil slump is alleviating pressure on consumers, leaders should move to lower tax breaks and other subsidies given to oil producers and also raise taxes on fuel. This would help to reduce demand, especially when oil prices eventually bounce back.

In the UK as in many other countries, falling wholesale prices are currently feeding through to lower costs at the pump for motorists, with a supermarket price war pushing diesel back below £1.10 a litre. Benchmark Brent crude moved up on Monday as commodities strengthened following a fall in the dollar, but has fallen back below $50 a barrel and remains close to the January nadir of $45.

Further price cuts are expected as analysts warn a supply glut is likely to keep global prices lower for longer.

Fuel in the UK is taxed significantly, but in order to encourage hiring or protect existing jobs, like the US it offers significant tax breaks to producers and uses public funds to support global exploration. The BBC has quoted figures putting the cost of exploration subsidies alone at more than £750m a year. The Government previously said it was helping firms find fossil fuels within the UK to "increase energy security, attract royalties and help with the balance of payments".

Frankel says the question often posed if we want to protect the environment is "should we want oil prices to go up, because that will discourage oil consumption, or down because that will discourage oil production?" He responds that governments should do both and "lower the price paid to oil producers and raise the price paid by oil consumers".

Oil price drop pushes diesel towards £1 a litre

10 August

Morrisons, Asda and Sainsbury's have announced price cuts on petrol and especially diesel.

The reductions follow similar moves by 'big four' supermarket rival Tesco last week and signal a renewed price war as global oil prices continue to fall.

Following a spate of cuts last month across all fuel retailers, Morrisons said it would reduce the price of diesel at all of its garages by 4p a litre and unleaded by up to 1p a litre, leaving average prices at 107p and 112p a litre respectively, according to City AM.

Tesco led the way with a cut of 2p and 1p a litre on Friday, Sky News reports, a move matched first by Sainsbury's and then Asda, which said motorists would pay no more than 108.7p and 111.7p at its forecourts.

Prices are falling because global oil prices ended a prolonged recovery last month and have now dipped back below $50 a barrel. Prices are down again in Monday trading and heading for $48. At $45 and below, the RAC has said £1-a-litre petrol is possible.

According to the Wall Street Journal, prices could also stay lower for longer than expected as futures contracts for oil in 2016 and 2017 have now fallen below even six-year lows reached in March. This indicates "investors, traders and oil companies see the global glut of crude oil persisting beyond this year" and is bad news for US oil producers, many of whom are already producing at unprofitable prices.

It is also bad news for exploration firms, with majors taking a big profit hit in latest results and many debt-laden smaller companies expected to go bust before the end of the year, according to The Times.

Norway is similarly struggling, with Bloomberg reporting unemployment has hit an 11-year high and the country may be forced to raid its sovereign wealth fund to cover bills.

Oil price: BP backs North Sea fields despite cuts

6 August

BP has said it will invest £670m to extend the life of North Sea oil fields for more than 15 years, even as major cost savings in response to the oil price slump have forced it to cut projects elsewhere.

The investment in the Eastern Trough Area Project (Etap) comes despite the firm announcing it would cut $3bn (£1.9bn) from capital spending in this current financial year as continuing low prices eat into profits. Trevor Garlick, BP’s regional president for the North Sea, told The Times that in spite of "challenging times" that are forcing it to make "hard choices", BP remains "committed to improving the competitiveness of the North Sea and to maximising economic recovery from our fields”.

One of BP's rivals, Shell, has said it will cut 6,500 jobs including 500 in Britain and that it could look at "restructuring its operations in the North Sea". Production peaked in 1999 and has been falling sharply in recent years, with Chancellor George Osborne this year introducing more tax breaks to encourage investment.

Oil prices had recovered in the early part of this year but are plunging back towards the low reached in January, with Brent crude slipping back below $50 again on Wednesday and remaining under this key threshold in Thursday trading. The Financial Times says the latest fall came on the back of data showing "record" production from Opec countries and resilient output from US shale producers, with oversupply concerns mounting ahead of a typical seasonal lull.

The paper says oil industry experts warn "the most significant oil industry shift in a generation" is under way and that the industry should prepare for a "prolonged period of low prices".

The Motley Fool says BP is one of the companies that is "well placed to ride out low oil prices", as its 'downstream' operations such as refining and marketing have seen profits rise five-fold due to falling oil prices, to offset some of the declines in its 'upstream' exploration activities.