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Oil Price Cruve Trapped in “W” Formation, Dan Yergin

By Bradley Olson and Edward Greenspon

Oil historian and economist Daniel Yergin has a forecast for where the price of crude is headed: all over the place.

The much debated shape of the oil-price curve will take the form of a W as crude is whipsawed by mixed signs from a rattled U.S. shale boom, while Saudi Arabia refuses to balance a global supply glut, Yergin said in an interview on Tuesday.

As spending cuts are forecast to begin easing production from shale next month, the fate of world oil markets is largely in the hands of a myriad of U.S. wildcatters, all with different strategies and an unusual ability to respond quickly to changed circumstances. Ramping down will be quicker and easier than stepping up production as prices recover, said Yergin, vice chairman of IHS Inc. Increased supply will renew downward pressure on prices and volatility will be exacerbated by storage and investment decisions, he said.

“It’s not a light switch,” he said of the producers’ response to an oil price slump, one of the themes to be discussed at next week’s IHS CERAWeek energy conference in Houston. “There isn’t going to be a landing place for oil.”

Yergin’s view is in line with those of other forecasters and analysts including Wolfe Research LLC’s Paul Sankey and ARC Financial Corp.’s Peter Tertzakian. Sankey, a former International Energy Agency analyst, has said the oil price curve will follow the pattern of a shark’s tooth in the medium term.

That’s because it will take time for crude produced at higher cost to come out of the market. Oil stored in anticipation of higher prices in the future will also put a ceiling on a near-term rebound, he wrote Feb. 13. Tertzakian has called it a “seesaw recovery.”

Momentous Year

Yergin, author of “The Prize,” identified this year as one of the most momentous in the history of the commodity. Demand growth from China, perhaps the biggest reason for oil’s meteoric rise in the last decade, has slowed. Meanwhile, risk to supply abounds in producing countries, from the proxy war being waged in Yemen by Iran-backed rebels and Saudi forces to ongoing tensions between Russia and Ukraine, he said.

“There is a lot of risk in the world, but there isn’t much of a risk premium in oil, which is unusual,” he said. “There is so much oil, the supply of it is so great that the fear of supply being disrupted in some fashion” is very small.

The past several years, in which North America surpassed Russia and Saudi Arabia as the world’s largest producer of oil and natural gas, are only the fourth time since the early part of the 20th century that there’s been such a sudden surge, he said.

Previous instances include the flood of new oil from East Texas in the 1930s, and again in the 1950s from the Middle East and more recently from North Sea and Mexican oil. The market accommodated each sudden surge with a price collapse, he said.

Upward Path

The path to higher prices could come as capital-spending cuts and reduced investment now equate to delays in bringing new production projects online by major oil companies, he said.

“The oil market is cyclical, supply and demand are not always in balance,” he said. “Will there be the sufficient long-term investment to keep the market balanced? This is still very early days as companies are making their adjustments.”

It remains to be seen whether demand will surge in the downturn, and Saudi Arabia appears to have that among its foremost considerations in deciding to let the market resolve itself, Yergin said.

“Demand is a real question mark,” he said. “Lower prices will stimulate demand, but the question is how much.”

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