(LONDON) Oil for delivery in future years is extending record highs, a sign that investors are betting that supply concerns and other factors boosting the cost of crude are unlikely to fade soon.
Oil for delivery in December 2015 set a record high of US$92.50 a barrel last Friday. When oil for immediate delivery hit US$100 for the first time on Jan 2, the 2015 price stood at US$88.33.
‘It’s telling us that the market is still looking for a long-term oil price that works,’ said Kevin Norrish, oil analyst at Barclays Capital. ‘The market believes higher prices are here to stay; the question is, how much higher do they need to be?’
The rise in long-term prices comes as a growing number of industry officials are questioning mainstream oil supply forecasts, underscoring the challenge of meeting ever-rising world demand for fuel.
‘We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development,’ Royal Dutch Shell chief executive Jeroen Van der Veer said last month. ‘After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.’
The International Energy Agency, adviser to 27 industrialised countries, warned last year that a supply crunch in the period to 2015 could not be ruled out. Among the factors driving long-term prices are falling production in some areas outside Opec as well as rising demand led by countries such as China.
‘The fundamental influences at work on the curve are strong demand growth and the poor performance of non-Opec supply,’ Mr Norrish said.
The rising price of oil for future delivery also reflects higher costs and the changing nature of production.
Oil industry costs have surged in recent years due to rising raw material prices and as oil companies tackle more complex projects in more remote locations, such as beneath deep water.
In addition, a growing portion of future supply is expected to come from so-called unconventional sources, such as by squeezing crude from tar sands in Canada, which need a higher oil price to make money.
‘The long-dated price is supposed to represent the marginal cost of extracting a barrel of oil,’ said Harry Tchilinguirian, senior market analyst at BNP Paribas. ‘Up until 2003, that long-dated price was relatively stable, around US$22 a barrel, but it is now as volatile as the prompt price.’
Source: Reuters (Business Times 18 Feb 08)