Terror in the nursery — Goldilocks cut in half

In December 2014, with Brent at around $50/bl, Opec secretary-general Abdullah al-Badri said: “We do not want a very high price because there will be less demand and consumption. We do not want a low price because there will be less investment and supply.”

When the price was $110/bl, or $100/bl, or $90/bl everyone was happy, he added. Well, US shale oil and Canadian oil sands producers certainly were.

To place the Goldilocks price at $100/bl was always to put it on the high side, but the — flawed — notion of a perfect price that allows just enough crude to be produced to meet the demand growth of a healthy world economy has had a lot of currency in recent years. So, in mid-2009 , we had Saudi oil minister Ali Naimi saying: “There is a good logic for $75/bl. Because $75/bl, I believe, is the price for the marginal producer.” And BP chief executive Tony Hayward saying: “There is elasticity of demand above $100/bl, and there is definitely elasticity of supply beneath $50/bl or $60/bl.” And EU energy commissioner Andris Piebalgs saying: “$70/bl definitely does not impede the recovery of the economy.” A few months later, IEA executive director Nobuo Tanaka joined the happy consensus in an interview with Argus Global Markets: “The price should not be too low for the sake of investment in renewables and energy efficiency. $80/bl is in our model. We do not say how high our model goes.”

But fast-rising non-Opec production, supplemented by fast-rising Opec production, has cut Goldilocks off at the knees. She’s half the girl she used to be. Last week, Russian oil minister Alexander Novak said: “Speaking fundamentally, prices cannot exceed $50-60/bl, as in this case strong investment activity will be back, bringing back projects that are now facing a reduction of investment and production volumes while prices will go down again. So we think the $50/bl price is most reasonable from the viewpoint of the demand-supply balance.”

Nigeria’s oil minister Emmanuel Ibe Kachikwu, advocating an Opec-non-Opec output freeze deal, said he hopes to see oil prices “in the range of $45-50/bl” by the end of the year.

Current IEA boss Fatih Birol says that “on the demand side, a $50/bl oil price will give a boost to demand growth as well”, while squeezing out higher cost production. The $50/bl number is gaining traction. Italy’s Eni says it can fund its capex from operating cash flow at that level. Wood Mackenzie says it’s a breakeven level for around two-thirds of oil and gas projects in sub-Saharan Africa.

Of course, a fairy tale just wouldn’t be a fairy tale without a scary wolf hiding in the forest. A US independent obligingly auditioned for the role. Pioneer has given due warning that it will add drilling rigs when prices for 2017 recover to $40-50/bl.

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