Brent oil this month broke a new record: for the first time, the benchmark crude has traded above $100 a barrel for more than 200 consecutive days. In 2008, when prices hit a record $147, the triple-digit run was just 170 days.
If the world’s top oil traders are to be believed, the record run is likely to be extended well into the future. The message from executives representing the world’s five largest oil trading houses by volume, speaking at the Global Commodities Summit in Lausanne this week, is clear: triple digit oil prices are here to stay.
“In the short term it is very difficult to get surplus oil really into the markets which would push the price down,” says Ian Taylor, chief executive of Vitol, the world’s top oil trading house.
Alex Beard, head of oil at Glencore, largely agrees, saying that the floor for prices is around $85 a barrel and the ceiling at around $130 a barrel. “$95-$100 is a long term level below which on a sustainable basis I don’t see us going,” Mr Beard says.
Oil is the most important commodity for the global economy – its price has the power to tilt the world into a recession, to control the profits of the global oil industry, and alter the dynamics of the US presidential election.
The reason for the traders’ bullish long term outlook – a decade ago prices were trading at just $20 a barrel – is the tight supply-demand picture in the market.
Even if the recovery of the global economy remains fragile, oil demand is showing signs of healthy growth, supported by extra demand in countries such as China.
At the same time, supply disruptions are plaguing the market. Oil production is down in places such as the North Sea, Yemen, Syria, South Sudan, Argentina and many others.
The combination of constrained supply and growing demand is requiring investment in ever more expensive supplies of oil and other fuels, from shale oil in the US and Canada, to deepwater reserves in the Gulf of Mexico, or Brazilian biofuels.
“We need all forms of energy we can get,” says Mr Beard of Glencore. “The question is what price stimulates that production.” He estimates the most expensive oils to produce require prices of $85-95 a barrel.
At the same time, the geopolitics of the Middle East is playing a crucial role. Iran’s oil production has fallen to a 10-year low and could drop to levels last seen during the Iran-Iraq war in the 1980s as sanctions over its nuclear programme disrupt an industry already suffering from years of under-investment.
The country’s production peaked above 4m barrels a day in 2006 – since then, it has fallen to less than 3.5m b/d – and some fear that the European Union embargo on Iranian oil and the new US sanctions could push production to less than 2.5m b/d.
“Chronic Middle East instability sets a floor to oil prices,” says Daniel Jaeggi, head of global trading at Mercuria.
David Fyfe, head of oil markets at the International Energy Agency, the consuming countries’ watchdog, adds that the budgets of the governments of the Opec producers’ cartel are equally important: “You also have to take into account what Opec individually and collectively wants to defend. For a number of Opec producers that may be $90-$100 in terms of what they need for their budgets.”
For all that, however, the market is offering some signs of relief for squeezed consumers and harried politicians. Brent prices have fallen more than $10 a barrel from a peak above $128 earlier this year, on Tuesday trading at $118.75.
Traders agree that the physical markets are soft, as Saudi Arabia pumps the most in 30 years and refineries shut down for annual maintenance.
“There are some signs there potentially of some easing of market fundamentals,” says Mr Fyfe, pointing to the first build in global oil inventories in 2½ years in the first quarter. But he adds: “It doesn’t necessarily mean we’re going to see any price collapse by any means.”
Nonetheless, traders in Lausanne say that prices could be capped at around $130 a barrel, as the rising cost of oil starts to put a brake on global economic growth.
As Pierre Barbé, president for shipping and trading at Total Oil Trading, says of oil prices at $125 a barrel: “That is too high for our economies, for producers and for politicians.”
He adds, however, echoing the consensus view, “I do not believe there will be a big downward correction from current prices.”
In the much longer term, there is much less agreement on where oil prices could trade. “The industry always underestimates its abilities to bring new oil to the market,” says Torbjörn Törnqvist, chief executive of Gunvor, the oil trading house.
Moreover, many believe that US natural gas prices, trading at 10-year lows below $2 per million British thermal units and at a record low relative to oil, will eventually reconverge with oil.
“We all believe that somehow that arbitrage has to narrow,” says Mr Taylor of Vitol. “I think that gap is going to come in, which could see lower oil prices.”