It wasn’t expected to happen for a few years but while West Texas Intermediate oil (WTI) has risen 12% in September, Brent oil, the benchmark oil used outside of North America, has been on a sizzling winning streak, increasing over $5.50 a barrel since Labor Day. By contrast, that’s Brent’s best performance in 13 years, and most expect this momentum will continue.
While this may suggest better times ahead, the recent surge is disappointingly tied to increasing geopolitical risk and growing concern that many U.S. shale producers can’t maintain their torrid pace of record domestic oil production at $50 a barrel, all the while losing money on the risky business assumption that greater volumes can compensate for the loss. According to Moody’s Investors Services, despite oil producers in both Canada and the U.S. making significant strides in cutting costs since crude’s collapse in late 2014, efficiencies are no substitute for healthy returns. Unless WTI moves higher, the ability to produce while attracting capital remains a serious impediment. The lack of capital expenditures (or capex) is sowing the seed for a very tight oil market of the future and its effects may already be seen with Brent oil values which now stand almost $6 a barrel above WTI.
Adding to supply concerns in an environment of limited capex, especially in the area of offshore oil exploration, is the emerging surprise rise in demand alluded to in our last blog. As Reuters pointed out last Thursday, U.S. oil producer Hess Corporation confirmed that “higher investments in offshore oil production are critical to avoiding a supply squeeze by 2020 as expanding shale output will not match projected demand increases in the next few years.”
Given the diverging realities of increased demand and throttled back crude production, price is finally beginning to emerge in what might now be described as the beginning of a price curve that could see it rise gradually in the months ahead, led by Brent oil.
The scenario of future oil shocks is starting gain traction where they traditionally get more attention: geopolitics. Events this week over the Kurdish referendum and the response by Turkey, Iraq and Iran, mixed with rising tensions on the Korean Peninsula and even Catalonia, Spain are seeing oil break with the price doldrums and capitalizing on bad news.