Shell Warns: Oil Price Recovery Will Take 5 Years

Toxic mix: slowdown in China and continuing oversupply.

By Andy Tully,

Ben van Beurden, the CEO of Royal Dutch Shell, and one of his senior executives envision low oil prices for some time unless energy producers cut production and the demand for fuel doesn’t rebound.

In a wide-ranging interview with Oil & Gas Technology published July 14, van Beurden spoke of competing benefits of the low price of oil for fuel demand, and its liabilities for those who produce it.

“Low prices have big implications for exporting countries like Iran, Russia and Venezuela,” he said.

“But also for shale-producers in the U.S., and even the domestic budgets of producers in the Gulf states. In consuming nations, low oil prices are an economic boon stimulating growth and demand.”

For the near term, van Beurden pointed to one key forecast that this year will see more worldwide demand than in 2014. “Compared to last year, the International Monetary Fund expects the global economy to grow [in 2015],” he said. “So global oil demand is expected to grow as well.”

But he stressed that many oil producers also are reluctant to explore and drill for oil because of smaller profit margins. Therefore, he said, “Supply … may even decline.” As for Shell itself, though, he said, “We’re determined to avoid a start-stop approach to investment.”

As for the global market, Van Beurden said that at best, “a rapid recovery could occur if projects are postponed or even canceled. This would lead to less new supply – not so much now, but in two or three years. Combined with economic growth, the market could tighten quickly in this scenario.”

But he pointed to one major snag in that view: U.S. shale oil. A boom in North American production over the past few years helped to create the glut that led to the steep decline in oil prices that began a year ago. OPEC, under the leadership of Saudi Arabia, decided to fight shale producers with a price war, hoping that keeping prices low would make shale extraction, already costly, unprofitable.

But if shale producers cut costs and take other steps to keep producing, van Beurden said, “With moderate economic growth, prices could stay low for longer.”

Van Beurden qualified his outlook by stressing that “I can’t predict the future,” but his director of oil and gas production outside America gave a more specific view of Shell’s expectations in a separate interview with Reuters, published July 16.

Andy Brown, a top Shell official, said the Anglo-Dutch oil giant forecasts no quick rebound in the average global price of oil, but only a gradual recovery lasting five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel, and the continuing oversupply of oil.

The price of oil has fallen from more than $100 per barrel in June 2014 to under $60 today, and Brown said the company has believed for months that it will take until 2020 for the price to rise to a mere $90 per barrel.

In fact, he said, that was a key driver for Shell to offer of $70 billion to buy rival BG Group more than three months ago. This not only supports van Beurden’s insistence that low oil prices won’t cause Shell to trim investments, but also expands Shell’s capabilities in deepwater oil production and gives it immediate entree to markets for liquid natural gas (LNG).

“It will take several years [for oil prices to recover fully], but we do believe fundamentals will return,” Brown said. “Until such time, we, like other companies, will have to make sure we stay robust.” By Andy Tully,

And the broader consequences? They’re already happening. Read… Epic Glut of Office Space Crushes Hope in Canadian Oil Patch

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  8 comments for “Shell Warns: Oil Price Recovery Will Take 5 Years

  1. retired says:

    Oil prices taking a beating & heading south!
    Who would have thunk it!
    I am still paying the same amount when I fill up my car,
    where is all that supply & demand I keep hearing about?
    How could this happen in a supposedly free market economy?
    Very perplexed,please send clarification!

  2. B.S. says:

    FTA – “For the near term, van Beurden pointed to one key forecast that this year will see more worldwide demand than in 2014. “Compared to last year, the International Monetary Fund expects the global economy to grow [in 2015],” he said. “So global oil demand is expected to grow as well.”

    Forecasts from the IMF are proving unreliable, and if China’s numbers continue to deteriorate, the expectations for world economic growth may prove to be too optimistic.

    Already the price of oil is stagnant and may slightly decline over the long term at the present level of world production. This is causing deleterious effects to countries like Venezuela, Mexico, Brazil, etc. and these economic effects may accelerate, causing widespread effects to the world market.

  3. The Trader says:

    I don’t think it will take that long for oil prices to recover. If you look at the historical charts, oil always makes a massive bounce (>50%) the year after a crash. This means that oil will rise to at least $65 by the end of 2016.

  4. Oil prices that are still ‘too low’ … are really too HIGH!

    Oil that is supposed to be in oversupply … is really constrained!

    Even @ the current TOO LOW $60/barrel price, the historical tariff for crude was $20/barrel or less FOR DECADES. The entire suburbia build-out/auto mania/freeway thingy occurred because it was subsidized by super-cheap petroleum fuels AND super-cheap credit.

    In the 1950s, when a tract house in Fairfax, Virginia cost $24,000, a $15k mortgage and the $9,000 down payments were bagatelles! Who could not afford a house?

    During the late 1990’s, the oil industry output (extraction quantity) was 5+ million barrels per day in excess of consumption …. this meant ‘zero-inflation’ and Greenspan’s ‘Great Moderation’. The excess five million barrels were ‘spare capacity’. Oil could be had on various markets for less than $6.50/barrel.

    Now the excess over consumption is a measly 1 million barrels per day — a rounding error. The customers are going bankrupt faster than they can be subsidized by ‘lower’ prices. There is no practical spare capacity, every extractor is running flat out, attempting to make up losses with volume … to make money now before the market crashes further … to try and survive the drillers are crushing their own market …

    Right now ‘liquids’ output is somewhat near 90 million barrels per day … in order to have another Great Moderation, the world would need about 105 mbpd output — about ten million more barrels than can be had. Because there is insufficient output there is insufficient consumption … one is connected to the other by way of credit. It appears that the current oil shortages don’t make consumers richer.

    Keep in mind, the marginal barrels of ‘liquid’ tend to be natural gas condensate — compounds such as hexane and butane — that are not usable as motor fuel. Conventional crude peaked in 2005 and has been declining relentlessly ever since.

    Just so you know …

  5. PL says:

    HOW HIGH OIL PRICES WILL PERMANENTLY CAP ECONOMIC GROWTH For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.

    HIGH PRICED OIL DESTROYS GROWTH According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

    BUT WE NEED HIGH OIL PRICES: Marginal oil production costs are heading towards $100/barrel

    The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth.

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

    Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production costs “the dark side of the golden age of shale”. In a recent analysis, it estimates that non-Opec marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in 2011.


  6. Dave Mac says:

    With things slowing down in China I can’t see prices rising in the near term. I wouldn’t be surprised to see oil sub $ 30 medium term either.

  7. SgtMilstar says:

    Fuel costs at the pump in Southern California are still above $4.00. Last friday I bought Shell Premium at $4.55 per gallon.

    • Wolf Richter says:

      In SF, regular at the station down the street is $3.99. OK, it’s a tourist-trap station with rental car agencies scattered around, so people have to put some gas into their rentals before dropping them off, but still!

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