Get used to cheap oil, de­riv­a­tives mar­kets say


Oil prices will stay low for years to come, de­riv­a­tives mar­kets say, keep­ing a lid on in­fla­tion and help­ing boost global growth. Oil has more than halved in value over the last year, thanks to huge over­sup­ply, and many oil com­pa­nies, par­tic­u­larly in the United States, say they may soon have to rein in pro­duc­tion, tight­en­ing sup­ply, un­less the mar­ket re­cov­ers.

That has led many an­a­lysts to pre­dict that oil - on av­er­age around 5 per­cent of com­pa­nies' costs - will see price rises later this year or in 2016, push­ing up in­fla­tion. But oil de­riv­a­tives tell another story. Con­tracts for de­liv­ery of crude oil in the fu­ture on the big com­modi­ties mar­kets such as the New York Mer­can­tile Ex­change (CME.O) and the In­ter­Con­ti­nen­tal Ex­change (ICE.N) show the price of oil in five years' time has col­lapsed in re­cent months. U.S. crude CLc1 now costs around $42 a bar­rel for de­liv­ery next month, and only about $20 more for de­liv­ery in 2020.

Prices of oil for fu­ture de­liv­ery are usu­ally much more sta­ble than volatile neart­erm prices, hold­ing their value even when the spot mar­ket crashes.

But the re­cent oil-price rout looks dif­fer­ent. Prices for all fu­tures months for years to come, also known as the fu­tures price "curve", have come down sharply.

"The curve is say­ing prices will stay low for some time," said Am­rita Sen, oil an­a­lyst at con­sul­tancy Energy As­pects.

Fu­tures prices are not fore­casts, not least be­cause liq­uid­ity tends to be low for long-term for­ward con­tracts.

But they are good in­di­ca­tors of sen­ti­ment be­cause they are a mar­ket where spec­u­la­tors bet on for­ward prices, and also al­low large pro­duc­ers and con­sumers to hedge fu­ture busi­ness.

An­a­lysts say the fu­tures curve is say­ing the cur­rent col­lapse in oil prices will be sus­tained be­cause it has been driven by mas­sive over­sup­ply that is likely to per­sist. Oil prices have col­lapsed over the last year as Saudi Ara­bia and other mem­bers of the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries have in­creased pro­duc­tion to try to pro­tect mar­ket share from com­peti­tors such as U.S. shale oil drillers.

The global crude oil bench­mark, North Sea Brent LCOc1, fell to al­most $45 a bar­rel in Jan­uary from above $115 six months ear­lier. Prices then ral­lied but have since plunged to­wards lows not seen since the fi­nan­cial cri­sis and long re­ces­sion that started in 2008/9.

U.S. oil pro­duc­tion has risen by more than 4 mil­lion bar­rels per day (bpd) over the last five years, thanks to new shale ex­trac­tion tech­niques such as "frack­ing", erod­ing OPEC's sales.

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