SERENE CHEONG

 

SINGAPORE (Bloomberg) -- Crude prices that have almost halved in the past year are unsustainable at current levels as cuts to investments and postponement of projects will lead to a decline in supply growth, according to Norway’s biggest oil company.

 

“We think that the price level now is too low,” Eirik Waerness, chief economist and vice-president at Statoil ASA, said in an interview in Singapore on Thursday. “Some people will stop exploring for oil. With oil prices around $50, you get a stimulus for demand growth. That will tighten the market.” Crude is expected to climb to $80/bbl in 2018 and increase gradually after that as existing supplies get used up, he said.

 

Oil slumped more than 44% in the past year as U.S. stockpiles expanded at a time when OPEC producers bolstered output to retain market share, exacerbating a global supply glut that the International Energy Agency estimates will remain until at least the middle of 2016. Producers hurt by the collapse in prices have had to fire workers, cancel projects and sell oil fields to conserve cash. Statoil on Wednesday announced cuts to planned investments in 2015 by $1 billion to $16.5 billion.

 

“The question is how much of the current change in the industry will lead to long-term cost reductions,” said Waerness. When “demand becomes larger than supply, and we will start drawing down storages. The market will suddenly realize that there’s very little spare capacity out there.”

 

West Texas Intermediate for December delivery fell 21 cents to $45.73/bbl on the New York Mercantile Exchange at 1:40 p.m. Singapore time. Prices, which were last above $80 in October 2014, have decreased 14% this year.

 

Cost cuts

 

Statoil also delayed the start of production at its Aasta Hansteen and Mariner fields to the second half of 2018 from 2017, the Stavanger-based company said Wednesday in its quarterly earnings report, joining competitors including BP Plc seeking to protect shareholder payouts.

 

U.S. crude inventories increased for a fifth week through Oct. 23 in the longest run since April, while refinery operating rates rose for a second week, Energy Information Administration data showed Wednesday. While supplies are more than 100 MMbbl above the five-year seasonal average, the oil glut is now being sustained by production outside the U.S., according to Goldman Sachs Group Inc.

 

The Organization of Petroleum Exporting Countries, which supplies 40% of the world’s crude, continues to pump above its collective target. Saudi Arabia, the world’s largest oil exporter, is storing record amounts of crude in its quest to maintain market share as it cut shipments. The United Arab Emirates is committed to its role as a responsible oil supplier and is not panicking about the price, Energy Minister Suhail Al Mazrouei said Wednesday.

 

“The underlying trend is that it’s going to come up, but it’s going to take a while,” Waerness said, referring to prices. “One of the reasons why it takes a while is because the storage is too high, and therefore the price mechanism doesn’t really work.”