The return of plus $50 crude after a seven month absence will not be enough to spark a wave of new North Sea development wells, a top oil industry economist said yesterday.
Benchmark Brent crude rose 1% to $50.22 at one point yesterday, its highest level since early November.
The price has rallied from a 13-year-low of about $28, which was reached in January, but is still well below the summer 2014 high of more than $110.
Alex Kemp, professor of petroleum economics at Aberdeen University, put the recent jump in crude prices down to disruption to production, citing instances of sabotage to pipelines in Nigeria, and the wildfires in Alberta, Canada.
Prof Kemp said the other possible factor was that market traders believe the bottom has been reached, prompting them to stop selling futures contracts and start buying them.
The upturn in crude prices has boosted stock markets which suffered a rough start to 2016.
London’s FTSE 100 Index is now 13% higher than its recent low in February, when it slumped to its lowest level for more than three years.
But Prof Kemp said investors will need more reassurance that the price is sustainable before committing funds to new projects.
“The question is: Is $50 likely to be sustainable? There is more doubt about that, it’s not entirely clear.
“You have to think about other issues, for example, what’s going to happen with production in Saudi Arabia, Iran and Iraq. These countries have potential to increase output rather more
“Also, there is going to be an OPEC meeting on June 2, but it’s not clear whether there’ll be an agreement.
“At the moment, the chances are they won’t agree to curtail production because there is not enough consensus in the OPEC group.
“For producers, $50 means the cash flow position has improved significantly, though some North Sea fields and still making losses, but for those who were making money, they can make more.
“For new developments, $50 won’t change longer term investment decisions.”
Mike Tholen, upstream director at Oil and Gas UK, said: “Whilst the gentle increase in oil price is welcome, even at $50 per barrel, oil is still less than half what it was in the summer of 2014.
“In these conditions, the UK North Sea industry will continue to struggle to sustain its current scale.
“Although the sector has seen success recently in reducing its cost to produce a barrel of oil or gas by a third, unfortunately the indications suggest that the oil price will remain lower for longer, so it’s crucial the pace of these efforts doesn’t abate.”
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