Oil executives could be forgiven for feeling like they’ve been mauled by bears over the past two years, with the crude price collapse shredding their balance sheets and devouring their share prices.
At a major industry conference in London this week, however, talk of angry grizzlies was on the back burner. Instead, many were prepared to bet the market is about to experience a Goldilocks moment, with prices not too hot, not too cold, but - finally - just right.
The overarching view was that oil is preparing to settle into a $50-$60 a barrel range. BP chief executive Bob Dudley picked that band when asked where he saw oil trading in 2017, while the heads of independent oil traders such as Vitol, Mercuria and Gunvor all predicted prices would trade between $55 to $58 a barrel this time next year.
The idea behind this supposed sweet spot is that is enough to stop oil producers going bust, but not so high as to reinvigorate rapid growth in the US shale industry and other expensive energy, which contributed to the glut in the first place.
Opec, led by Saudi Arabia, has reversed course and is prepared to try again and manage the market. Their ambitions have been lowered from the $100 crude they enjoyed between 2011 and 2014, after they realised (belatedly) the largesse they were enjoying was stoking higher cost production around the world.
Look a little closer at this Goldilocks moment and it is clear the porridge on offer is still a little lumpy. The prospect of a commodity as volatile as oil trading in such a tight range for years is likely a far-fetched idea. And even if it did, no one will be fully satisfied.
Even if prices do not return below $30 a barrel, it still implies greater financial turmoil for those nations that rely on oil exports to fill government coffers. Saudi Arabia, which is arguably among the most resilient in the Opec producers group, just this week launched the sale of a mega $17.5bn debut sovereign bond, underlining the precarious nature of its fiscal position.
Oil majors such as BP and ExxonMobil have slashed costs and investments in the past two years, but will still face a severe test in covering capital spending and dividends from cash flows with oil loitering not much above $50 a barrel.
There is still huge uncertainty about how the shale industry responds to $50-$60 crude. Ryan Lance, chief executive of ConocoPhillips, which is active in the biggest US shale fields, said parts of the Permian, Bakken and Eagle Ford are now profitable at $40 a barrel.
ExxonMobil chief executive, Rex Tillerson, said shale would be enough to ward off future supply shortages, but found little support among his peers for that view who fear the industry may still need more expensive ‘mega projects’ to meet growing demand.
In the short term, as Opec convenes in Vienna for its next meeting of ministers market observers are split on what it could mean for price. Some say any cut to production may come too late, as stocks are already drawing down, meaning they could risk cutting back too much.
For the moment traders and hedge funds are backing the move into the band, sending prices up by 15 per cent since September when the cartel first committed to rein in flat out production. Should they fail to fulfil that promise, crude is set up to spiral below $50 a barrel again if the market moves en masse to take profits.
“I don’t think $50-60 solves some producers’ longer-term fiscal requirements,” says Bill Farren-Price, an energy industry consultant. “But it may be enough to spur a revival from surviving shale producers . . . It is always a question of degree but it could end up being the worst of both worlds for Opec producers.”
That price may keep the pumps going, but may not save countries with booming fiscal deficits such as Opec members Venezuela and Nigeria.
Just three years ago many in the industry were prepared to believe oil could stay above $100 a barrel far into the future. The $50-$60 Goldilocks band may well prove to be another fairytale.