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Many people think the oil price has crashed, but it has just gone back to its long-term historical trend, according to Ruchir Sharma at Morgan Stanley Investment Management Inc. That makes a barrel of oil at around US$50 just about right based on a 100-year average, said Sharma, who manages US$25 billion as head of emerging markets.
“The price of oil is returning to normal in its long-term 100-year history,” Sharma said in an interview from New York. “We tend to have a short memory and we tend to forget that the price of oil breached the US$50 a barrel level only a decade ago.”
Brent crude oil futures, which trade in London and are used as a benchmark to set prices for more than half of the world’s oil, reached a record of US$139.83 a barrel on June 30, 2008, according to data compiled by Bloomberg. By Jan. 13, the price had plunged 67 percent to US$46.59.
The plunging price of oil, coupled with advances in clean energy and conservation, offers politicians around the world the chance to rationalise energy policy. They can get rid of billions of dollars of distorting subsidies, especially for dirty fuels, whilst shifting taxes towards carbon use. A cheaper, greener and more reliable energy future could be within reach. An International Energy Agency report Friday shows the first tentative signs that the strategy may work.
"The oil sell off has cut expectations of 2015 non-OPEC supply growth by 350,000 barrels per day since last month to 950,000 barrels per day," the IEA said. "Effects on North American supply are so far limited to [95,000 barrels per day and 80,000 barrels per day] to the Canadian and U.S. forecasts, respectively."
The impact of cheap oil would ordinarily be higher, the IEA said, but supply growth isn't slowing more quickly in North America because many producers appeared to be well hedged against short-term price drop. 2014 was a record year for oil output for non-OPEC nations, with growth of 1.9 million barrels per day, the IEA said in its report. Two other major oil nations, Colombia and Russia, have also seen their growth output slashed, by 175,000 barrels in the former and 30,000 in the latter. OPEC nations, meanwhile, are actually pumping out more oil, up by 80,000 barrels a day to 30.48 million for the cartel as a whole. The biggest contributor to that increase is Iraq, which is currently pumping out more oil than at any other point in the last 35 years. Now new factors are in play.
Technological change has broken the power of the Organisation of the Petroleum Exporting Countries (OPEC) to keep the oil price high. Hydraulic fracturing (“fracking”) and horizontal drilling have turned America into a big oil producer, with 4m barrels a day coming from sources which used to be deemed “unconventional”. The boom in producing oil and gas from shale has yet to spread to other countries. America enjoys some big advantages, such as open spaces, accommodating laws, a well-developed supply chain and abundant finance for risky projects. So far it has refrained from exporting its crude oil or natural gas, but exports of liquefied natural gas (LNG) will start this year. Increased trade in LNG will create a more global gas market and greater resilience of supply, undermining Russia’s pipeline monopoly in Europe. America is already exporting lightly refined oil.
Those tentative signs of a rebalancing in the market were a positive for the oil price, which gained 75 cents to $47 US a barrel for the North American benchmark known as West Texas Intermediate or WTI.
In its January report, the IEA said it could see the foundation of a rebound in the oil market some time in the second half of 2015. If and when that happens, it won't be because there is less oil being pumped, but rather because cheap prices will encourage demand as the economy grows because of cheap energy.
"With a few notable exceptions such as the United States, lower prices do not appear to be stimulating demand just yet," the IEA said.
Until that happens, the IEA is expecting low oil prices to persist.
"How low the market's floor will be is anybody's guess. But the sell-off is having an impact," the IEA said. "A price recovery — barring any major disruption — may not be imminent, but signs are mounting that the tide will turn," said the agency.
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