World oil prices are set to fall further, extending a months-long rout because Saudi Arabia is unlikely to make deep enough production cuts to erase a growing surplus, according to Gary Ross, chief executive of PIRA Energy Group.
Although there are faint signs of improving fundamentals in some physical crude oil markets, any uptick in prices ahead of OPEC's Nov. 27 meeting will be short-lived. The cartel is struggling to rebalance a world market heading toward a 1 million to 1.5 million barrel per day (bpd) excess next year, he said.
"Structurally, the market is oversupplied. Something has to give and we think it will be price," Ross told Reuters in a interview.
"Clearly $100 a barrel is too high," he said on the sidelines of PIRA's Annual Seminar, a closed-door event at which the New York City-based firm releases its oil and gas forecasts to over 1,000 clients. "Even current prices are too high. There will have to be more pressure."
On the basis of supply and demand, without any intervention by OPEC, Brent prices would have to fall to $75 to balance the market, Ross told the seminar, although that is unlikely. Instead, Saudi Arabia is expected to cut production to some 9.2 million bpd next year.
"I think the Saudis will cut, but it won't be enough" to prevent a further decline in prices, he said.
Since June, global benchmark Brent crude oil prices have tumbled more than 20 percent, or almost $25 a barrel, to their lowest since 2012. The drop was blamed on a growing glut of crude in the Atlantic Basin caused by stalling demand growth, unyielding U.S. shale output and filled-up storage tanks. Brent closed at $91.37 a barrel on Thursday.
Meanwhile, the U.S. benchmark crude, West Texas Intermediate, for November delivery dropped $1.54, or 1.8 percent, to close at $85.77 a barrel on the New York Mercantile Exchange. It was the lowest settlement since Dec. 10, 2012.
Ross's comments set the stage for what will be one of the most important meetings in years of the Organization of the Petroleum Exporting Countries. While the surge in U.S. shale oil production has been building steadily for several years, a succession of outside events — from war in Libya to sanctions on Iran — have intervened to shore up prices.
"OPEC has been lucky, 3.5 million bpd of shale production has been absorbed through disruptions. They're running out of luck," said Ross, who is considered among the most influential energy experts in the industry.
While some members are already talking about the need to curb output and shore up prices, kingpin Saudi Arabia has just cut its export prices to defend its market share.
The cartel, which has not cut output since just after the 2008 financial crisis, will try to agree on broad curbs, but is "highly unlikely" to do so, particularly with some members already pumping well below capacity and others facing budget stress, he said.
That sets the stage for a tough conversation with Saudi Oil Minister Ali al-Naimi, who has grown increasingly impatient with many of the cartel's fractious members.
"The Saudis are not responding to lower prices. They're defending market share," said Ross, who has been consulting with OPEC members for decades.
Nor does he expect to see the growing pressure on U.S. shale oil basins translate quickly into less drilling. Many producers have already hedged prices for next year's production, delaying the impact of lower prices on their cash flow.
"The trouble with shale is that it will take time to see a significant decline in production," he said. "It probably won't happen in 2015, really more a 2016 or 2017 event depending on how low prices go."
LONG-TERM VIEW
PIRA, a boutique firm that has shunned the media spotlight, was founded in 1976 and has developed a reputation for detailed, ground-up oil and gas market analysis influential enough to move world prices. One of its top executives, Michelle Billig Patron, left the firm last year to become a senior advisor to President Barack Obama.
While Ross and the firm he owns are household names in energy trading and industry circles, they are little-known beyond. That is beginning to change, however. PIRA has hired a handful of new senior executives to help expand its coverage and services to more global customers.
Despite the bearish medium-term outlook, Ross believes prices are likely to rise back toward $100 a barrel or higher in several years' time. Lower prices will help stimulate economic growth, emerging market consumers will crave more fuel and oil drilling in high-cost areas will slow.
Saudi Arabia has been in tougher predicaments before. In the early 1980s, the kingdom slashed production from 10 million bpd - roughly equal to the amount its pumping today - to near 3 million bpd to revive prices that had collapsed.
Lower short-term prices may even suit Saudi Arabia, helping curtail high-cost oil alternatives.
As Assistant Petroleum Minister Prince Abdulaziz bin Salman said in September: "The main focus of the Kingdom has always been on the medium and long-term fundamentals."
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