Davos oil view: Roubini to Kazakhstan agree slump can’t last

One thing that oil producers congregating in Davos agree on is that the oil rout can’t go much further. There’s less consensus about when the recovery will arrive.

From nations such as Kazakhstan and Saudi Arabia, to top trading houses like Mercuria Energy Group Ltd., delegates at the World Economic Forum generally concur that the global glut will begin to dissipate this year as the lowest prices in 12 years force cuts in spending and production. Even Nouriel Roubini, the economist dubbed “Dr. Doom” for predicting turmoil before the 2008 financial crisis, believes prices will recover in 2016.

“We are reaching the bottom of the oil market,” Mercuria Chief Executive Officer Marco Dunand said in an interview on Friday. “Oil producers are strained to the limit and some of them are pumping at a loss.”

The guardedly optimistic tone was in line with price movements in oil markets on Friday. Brent futures rallied 6.7 percent, capping their biggest two-day advance since August.

“Oil prices can go lower even from current levels but if they’re going lower toward $20 a barrel, I don’t think they can stay there,” Roubini, chairman of Roubini Global Economics LLC, said in a television interview on Friday. “At that point there’ll be producers that cannot produce profitably and they’re going to cut back on production. By year end, it has to be above $40 because the fundamentals do not justify oil at $30.”

Cheap Oil

Kazakhstan, while braced for the risk that crude will hit $20 in the first six months of 2016, expects a recovery to $30 to $40 a barrel in the second half, Prime Minister Karim Massimov said in an interview. Still, the “era of cheap oil” could persist for another five to seven years and the Central Asian country is prepared to withstand a drop to $16 a barrel, Massimov said.

“At some point we will shut in production” as space to store surplus crude runs out, Goldman Sachs Group Inc. President Gary Cohn said. “Everyone that you’re going to talk to will tell you that supply is starting to diminish. This will run its course. It has done every cycle and I guarantee you it will this cycle.”

The qualified optimism expressed on Friday echoes views aired on Thursday by Azerbaijan, Nigeria and Saudi Arabia at an energy-themed discussion.

A price recovery is “inevitable” as crude has overshot to “irrational” levels, with $30 a barrel too low to ensure spending on production, Saudi Arabian Oil Co. Chairman Khalid Al-Falih said. Emmanuel Ibe Kachikwu, petroleum resources minister of state at OPEC counterpart Nigeria, predicted a rebound to $40 by the end of the year. For Azeri President Ilham Aliyev the price floor is only $2 or $3 away.

Executive Caution

Most of the oil executives and representatives of energy-rich nations who met in a closed session in Davos on Thursday agreed the market was oversupplied by about 1 million barrels a day and that lower spending on new projects would bring supply and demand into balance next year, according to one of the participants who asked not to be identified because the meeting was private.

Oil company executives speaking in public at the Swiss resort have sounded less optimistic. BP Plc CEO Bob Dudley warned on Jan. 21 that the industry is struggling with a “flood of oil,” while Glencore Plc Chairman Tony Hayward predicted things won’t get better until the “supply shock” passes.

While global stocks have dropped in tandem with oil prices, the dangers to the world economy from the slump in crude shouldn’t be over-stated, and cheap fuel is delivering a stimulus to consumers, according to BlackRock Inc.

“There is a benefit to the economy and the developed world,” said Rick Rieder, chief investment officer of fundamental fixed income at BlackRock. “We’ve heard in a bunch of economies there is a tangible benefit coming in.”

Crude Opportunity

For the European Union, the slump offers an opportunity to phase out subsidies for fossil fuels, said Maros Sefcovic, European Commission Vice President for Energy Union. Still, any belief that cheap oil is an unalloyed blessing was dispelled by Iraqi Prime Minister Haidar al-Abadi. The OPEC member doesn’t just rely on oil revenues for social spending and infrastructure projects: it’s engaged in a life-or-death battle against the militants of the Islamic State, and will need help from the International Monetary Fund to ride out the storm.

“We’ve been anticipating there would be some drop of prices but this has taken us by surprise,” Abadi said in an interview in Davos. “We can defeat Daesh but with this fiscal problem, we need the support. We have to sustain the economy; we have to sustain our fight.”

Culled from Bloomberg