Back-end of oil futures curve poised to rally

 

Future supply shortages could drive up contracts for oil use in several years' time, as they mimic a market for near-term delivery that has more than doubled since the start of the year.

The difference between the price of oil for immediate delivery and that for delivery five and a half years in the future has narrowed significantly since the start of 2009.

While front-month crude contracts crashed from a record peak of almost $150 a barrel in July 2008 to lows near $30 a barrel at the turn of the year, the longest dated contracts never fell below $70 a barrel.

Since March, front-month contracts have more than doubled in price to trade around $80 a barrel. But over the same time period, long dated contracts have risen by just one third, running into resistance at the psychological $100 a barrel level.

"The middle and the back end of the curve have really come in, partly because demand has started to recover" Barclays Capital analyst Amrita Sen said.

"The back of the curve has stabilised around $95, which is very much in line with our view - the ground has been laid for a move up. If the long-term view is demand will rise faster than supplies then there's a case for the back end of the curve to make further gains - especially out to 2017."

When front-month prices peaked in July 2008, long dated contracts rose almost in line towards $150 a barrel, reflecting the view booming demand from emerging powerhouses such as China and India could eventually outstrip the world's ability to extract enough oil.

"The prospect of peaking prices has been pushed out again towards 2020" Bank of Ireland analyst Paul Harris said. "But I think people are over estimating the effect of the green economy and higher prices on demand. It's not going to reduce oil consumption as much as some would like to think." 

The International Energy Agency, the adviser to 28 industrialised nations, said in its latest long-term energy scenario oil demand could rise to above 90 million barrels per day by 2017 and to 105 million bpd by 2030 from current consumption levels around 85 million bpd.

Major figures in the oil industry, including the CEOs of both Conoco Phillips and Total, have expressed doubts global oil production will ever be able to rise far beyond the 90 million barrel mark.

THE BIG QUESTION

While the majority of analysts see demand for oil rising long term, the supply picture is less clear. Concerns output at mature oil fields could decline faster than at first predicted has added to the case for higher prices.

But a more positive outlook for Iraq, which sits on top of the world's third-largest oil reserves, could see global supplies rise.

Iraqi exports, stuck near the 2 million bpd mark after years of sanctions and war, have the potential to add millions of barrels of oil to the market in a relatively short period of time, with oil majors now signing deals to develop some of the world's largest known fields - despite the political risks.

"These will be some of the biggest oil projects ever undertaken" Global Insight analyst Samuel Ciszuk said.

"On a 20-year horizon, it is not inconceivable to see 10 million bpd of Iraqi production - at least according to what the oil companies themselves are saying."

Analysts at the PFC Energy consultancy said output was likely to be far lower initially. 

"PFC Energy's initial assessment of existing conditions, physical infrastructure, resource and political constraints suggests incremental output in the 1.5-2.0 million bpd range by 2015" analysts at the consultancy said in a research note.

PFC also highlighted Brazil, Russia, Nigeria and Kazakhstan, dubbed collectively with Iraq as 'BRINK' nations by the consultancy, as areas with the potential to maintain or increase their oil output.

Harris at Bank of Ireland said investors in the market were well aware of Iraq's potential. But many doubted whether huge output gains would be possible given the far from clear political outlook for the country.

"Output from Iraq is obviously subject to huge geopolitical risk" Harris said. "No one is convinced it's going to happen yet.

"Ultimately we're going to see a sustained upward move - both in demand for oil and prices."