Fears of future output crisis grip firms

New York: Rising concerns about an energy supply crunch in the coming years are helping send up long-term crude prices much faster than the dazzling rally in short-term prices, a trend that could prompt oil companies to start beefing up stockpiles.

Analysts say a rise in resource nationalism during oil's six-year rally has ratcheted up the cost of doing business in many producer nations and has reduced access to key reserves needed to meet growing world consumption, spelling a worsening energy crisis in the next five years.

"Since the first of the year, if you look at spot WTI [West Texas Intermediate crude oil], it is up 30 per cent, but when you focus on the long-dated (it is up) 50 per cent," Goldman Sachs analyst Jeff Currie said in a conference call.

"The long-dated price is not pricing the supply and demand of the fungible commodity that we see today but rather pricing supply and demand of long-term capital to invest in long-term production cap-acity," he said.

Front-month price

Front-month crude oil shot to a record near $134 a barrel Wednesday, but December 2013 peaked at over $138 while December 2016 crude topped $142.

This market structure, called a contango with near month crude trading at a discount to later month crude, generally reflects a near-term supply overhang and expectations of tighter markets further out. But it also tends to encourage energy companies to fill up their storage tanks as the supplies they are storing gain value over time.

"I fully expect that for the next seven quarters we are going to see a commercial inventory build [with] supply outpacing demand," said Edward Morse, chief energy economist for Lehman Brothers.

Countries with substantial energy reserves like Venezuela and Russia have put tough controls on foreign energy companies seeking to develop those fields, limiting production growth and leading to some output declines, analysts say.

Goldman Sachs said in a recent report that long-term world supply growth has slowed to around one per cent while GDP growth has accelerated to 3.8 per cent - the ingredients for a medium-term supply crunch.

Other analysts agree resource nationalism could tighten up the market down the road, but add the dismal outlook painted by Goldman may be overstated. "There is a recognition that the above ground risks to production have gone up recently, but there is a tendency for the market to extend that into the future," said Antoine Halff, analyst for Newedge.

'Overstated'

"You can't turn [resource nationalism] off on a dime and it probably takes longer to fix the investment climate than it took to wreck it, but I think the assumption that some of those pressures are structural and will only get worse may be overstated," he said.

Oil has risen sixfold since 2002, as supply struggles to keep pace with surging demand in economies like China and India.