Brent crude to average US$55 till 2050, says BP

London

OIL prices have recovered substantially from their recent record lows but there is still a flood of inventory out there.

This suggests that Brent crude oil prices, which have jumped from US$19 a barrel in April to US$38.60 this week, are likely to struggle to reach their early-January highs of US$64.70.

This is despite the International Energy Agency's (IEA) estimate of a record supply cutback of 11.8 million barrels a day by the Oil Petroleum Exporting Countries (Opec) and other producers.

BP, for example has forecast lower oil prices for decades to come as governments speed up plans to cut carbon emissions in the wake of the coronavirus pandemic.

It has cut its price prediction by around 30 per cent and expects Brent crude to average US$55 a barrel from now until 2050. This compares with Royal Dutch Shell's US$60 figure in its 2029 annual report.

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BP chief executive Bernard Looney has admitted, however, that "nobody knows what the price of oil is going to be in the future".

The company has to make an "educated guess" to assess future production and capital expenditure strategies, he said.

In its latest quarterly report, BP abandoned plans to develop a series of oil fields where it has already invested billions in exploration.

Analysts expect it to write off up to US$17 billion, which is more than half of the value of its undeveloped assets, the biggest of which are in the Gulf of Mexico, Canada and Brazil. The rest of the charges relate to reducing the value of existing assets.

The IEA spells out that OECD industry stocks rose by 148.7 million barrels or 4.9 million barrels a day in April.

At total levels of 3.14 billion barrels, inventories were 208.3 million barrels above the five-year average and would last 72 days on estimated 2020 OECD demand.

US commercial stocks in early June were at record highs, and government strategic inventories totalled a further 1.54 billion barrels.

The IEA estimates that oil demand in 2020 is expected to fall by 8.1 million barrels per day, the largest in history, before recovering by 5.7 million barrels per day in 2021.

Reduced jet and kerosene deliveries will impact total oil demand until at least 2022, said the IEA. This decline is projected to take place, even though the IEA has raised its demand estimate by 500,000 barrels a day to 91.7 million barrels a day in 2020.

Deliveries were larger than expected during the lockdown. In China, oil demand recovered fast in March-April and India's demand rose sharply in May.

Following the sizeable cutbacks, supplies are estimated at 88.8 million barrels in May, so currently there is a deficit between demand and supply, the IEA said.

The huge inventories that have been built up, however, are expected to easily meet consumption in the US, Europe, Asia and elsewhere. "Floating storage" of oil on oil tankers, for example, was 165.8 million in May.

Oil prices originally plunged in March when Saudi Arabia and Russia agreed to raise production. The move was to place pressure on the oil fracking competition in the US and Canada.

Several of these companies are under acute pressure because they have large debts. But they have been relieved to some extent as US West Texas Intermediate crude prices have jumped from negative a couple of months ago to US$38.14.

The premium of Brent over WTI prices has narrowed to 6 per cent from more than 20 per cent at one stage.

BP's latest Energy Review estimates that in 2019 oil accounted for 33.1 per cent of global primary energy consumption followed by coal (27 per cent), gas (24.2 per cent), hydro (6.4 per cent), renewables (5 per cent) and nuclear power (4.3 per cent).