High oil price volatility may continue due to structural factors, says expert
International oil prices are likely to continue to see high volatility in the coming few years with structural causes unresolved, according to Roger Diwan, vice president of financial services and energy with international consultancy company IHS Markit.
Speaking at a panel discussion along ongoing energy industry conference CERAWeek on Thursday, Diwan said, “If you think about the last quarter (of 2018), we had extreme volatility. The volatility we’re having I think it’s structural.”
Diwan noted that oil prices tanked 40 percent within 60 days. He said there are five such price movements in the history of the oil market, three of which were registered in the last four years.
“So shale has brought that structural volatility and we haven’t solved that problem yet,” he said.
U.S. shale oil companies tend to spend more when oil prices go up and it takes time for them to spend less when it goes down. So it creates this oversupply in the market, according to Diwan.
Shale oil companies usually set a budget to begin at the beginning of the year. If prices go higher, they’ll spend more because they have more cash at hands. But when prices go down, shale oil companies are not going to spend less, so they never dial down or will do it in next year’s budget, according to Diwan.
Diwan said the United States is a swing producer of oil, and U.S. shale oil companies could make intra-year adjustments in production. “So you’re going to see very volatile pricing, very volatile to me and the U.S. projects,” he said.
The big swing of oil prices seen over the last six months is likely to happen sometime in the next few years, said Diwan.
He added that the world is coming up into a very disruptive and very dislocated physical market without knowing how to get it resolved.
Diwan said the difference between U.S. West Texas Intermediate (WTI) and British Brent crude oil futures prices would get bigger in 2019 and 2020 due to the continuous growth of a lot of light sweet oil and commissioning of gas pipelines in Permian basin of the United States.
Diwan forecasted that daily U.S. shale oil output would increase by 1 million to 1.2 million barrels each year if WTI prices stay at 65 dollars per barrels consecutively for a period of five years.
Volatility rather than the price of crude oil tell us much, according to Diwan.
WTI prices plummeted to slightly over 42 U.S. dollars in late November 2018 from over 76 U.S. dollars per barrel in the beginning of October 2018.
CERAWeek is an annual energy meeting held by the London-based information company IHS Markit featuring speakers from the energy, technology and financial sectors. This year’s meeting was attended by more than 4,500 guests from over 70 countries and regions.