World’s 2nd-Biggest Sovereign Fund Sees Oil Glut until Mid-2017

According to the head of research at the world’s second-largest sovereign wealth fund, due to the time that the market would take to absorb excess crude in storage, the global oil glut will probably persist until at least next summer.

Christof Ruehl, the global head of research at Abu Dhabi Investment Authority, said Wednesday in an interview in Dubai that the response of shale producers to rising prices will help determine how high crude can go even as the supply and demand for oil are coming back into balance.

However some industry leaders and analysts presents a more optimistic outlook for the global pil market and forecast that demands would be nearing supply by the end of this year. Ruehl’s views that the re-balancing act of demand and supply will take until at least the middle of 2017 which is in contrast to some of the more optimistic opinions.

“The markets should work with the inventory overhang and then re-balance only once that overhang is gone,” Ruehl said.

“When the winter season comes, we will have a clearer idea at which level this re-balancing occurs,” he said. He expects the process “will go at least to the summer” of 2017, Ruehl added.

In 2014, in a struggle for sales with higher-cost producers including U.S. shale drillers, the OPEC decided to let its members pump without limits which resulted in excess supply of crude in the market and led to the oil glut. The markets are now slowly recovering from that excess supply condition.

While the Organization of Petroleum Exporting Countries said in its latest monthly market report that excess supply would “ease over the coming quarters”, BP Plc Chief Executive Officer Bob Dudley said on June 16 that he expected the market to come into balance by the end of 2016.

Goldman Sachs Group Inc. said in an e-mailed note on June 6 that at the current level of rig count, the aBottom of Form

verage annual U.S. production would decline by 665,000 barrels a day in 2016 and 420,000 in 2017. As U.S. industry data showed a decline in crude stockpiles, West Texas Intermediate crude traded above $50 a barrel this week. After having dropped to a 12-year low in February, WTI futures have gained more than 90 percent.

Ruehl said that after disruptions end in Libya, Nigeria and Canada, oil production and exports will become less volatile. Ruehl had previously worked as BP’s chief economist before he joined ADIA, the largest sovereign wealth fund after Norway’s. He added that such outages have supported this year’s rally in crude prices.

“What it takes to get to $60 is very simple: some more supply disruptions. What it takes to stay down is some of that oil coming back,” he said earlier in an interview with Bloomberg TV.

If Shale producers in the U.S. and elsewhere have “reasonable expectations that prices will not be back to $30 or $20 in a few weeks time,” they would only ramp up production, Ruehl said. “The stronger and faster shale production reacts to higher prices, the more limited the price increases,” he added.

(Adapted from Bloomberg)

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