Crude price buoyed for two years: Argus conference

Crude prices will remain supported for the next two years, potentially breaching $100/bl, the Argus Global Crude conference in Geneva heard.

Speakers said that the risk to global crude prices over the next 18 months is overwhelmingly to the upside. "The next couple of years will probably be the most exciting for the crude market in our lifetimes," one speaker said.

The pace of US shale production growth and the upcoming change in IMO regulations surrounding the sulphur content of marine fuel will add significant uncertainty to the relative prices forecasts for different types of crude. The impact of the IMO regulations, Opec's role in controlling production and geopolitical risk will all contribute to an era of significant change. But the short-term impact will undoubtedly buoy prices, delegates heard.

The growth in global oil demand is expected to be both robust and broad in the next two years and global spare production capacity is already insufficient to offset any major disruptions. Risks to global production remain, with geopolitical risk continuing in north and west Africa, while the Venezuela oil sector is in almost critical condition, according to one speaker.

"The market is currently very, very tight," a speaker said. "If something blows up, oil could easily go above $100/bl".

The effect of the re-imposition of US sanctions on Iranian exports has already had a deeper impact than many expected. This has been partly driven by a reluctance by the financial community to fund any trade in Iranian crude ahead of November's sanctions deadline.

While US shale production is often seen as the obvious candidate for replacing lost production and meeting rising demand, several speakers pointed out that the pipeline takeaway capacity in the US is insufficient to meet production forecasts for the US Permian basin. By the third quarter of 2019, the pipeline capacity constraints will begin to slow Permian production growth rates.

Another issue will be quality. US tight oil production is largely light oil, but demand growth will be focused on medium gravity crude. US refiners are unlikely to absorb the extra barrels as they are already taking all the light oil they can. Global refiners are geared towards the production of diesel and other middle distillates, for which US shale oil is ill-suited.

Attendees heard that while there is much uncertainty surrounding the upcoming IMO changes, the impact will undoubtedly be supportive of prices.

Underinvestment in the upstream industry over recent years poses a significant risk to global output, with smaller producing areas particularly imperilled. The shortage of investment is something that needed to be addressed. "We have to invest", one speaker said. "Whether demand goes up or down, capacity is dropping as production matures."

Any downside risks to global prices are long-term. Higher oil prices could combine with rising interest rates to prompt an economic recession, dampening demand.

The rise of shale production and the IMO changes are likely to introduce further volatility into the market, delegates heard. "Prices will initially move quite violently," according to one speaker. "this is good for trading."

The next two years are also likely to see changes to the world's crude benchmarks, with the North Sea Dated price likely to undergo a significant overhaul. More barrels will need to be included in the price, although speakers saw no easy solutions and a consensus on which grades should be included will be difficult to achieve. Most agreed that a delivered element into the benchmark will be needed, with WTI a leading candidate for inclusion.