The price of a barrel of Brent crude fell below $35 on Wednesday for the first time since 2004, a remarkable event given that the global economy, while plainly not red hot, is several degrees above lukewarm.
Even after the banking crash of 2008, and the global recession that followed, oil only briefly traded below $40 a barrel. So, you would assume, a rebound in prices must lie around the next corner, just as the Opec cartel and oil company chiefs keep telling us.
One of these days – or months, or years – those predictions of more expensive oil will be proved correct. Today’s glut of supplies always becomes tomorrow’s shortage as exploration and production budgets are slashed and low prices stimulate demand. The question, however, is when that day arrives. The guess here is that it’s still some way off. In the short-term, sub-$30 oil seems a real possibility.
First, almost nobody has stopped pumping the stuff. Opec is in disarray and unable to agree on production quotas. Instead, it is obliged to march to the Saudis’ apparent policy of trying to break the US shale industry. So far, that strategy has yielded next to nothing. Overall, US oil production continues to rise and the US shale producers have shown that they cut costs like everybody else. It’s true that exploration is slowing down, but actual production volumes matter more in the short-term.
Second, the old assumption that a surge in tensions in the Middle East implies higher oil prices probably doesn’t apply this time. Saudi Arabia and Iran are at diplomatic loggerheads but the effect on supplies may be zero. Iran doesn’t want to imperil its return to world oil markets when sanctions are lifted this year, as seems likely. The Saudis don’t want to cede market share to an economic rival.
Third, the real state of the Chinese economy is a mystery to most outsiders but almost every piece of the data in the past year points to a slowdown that’s sharper than the official statistics imply. Then there’s a potential joker in the pack from the US economy. Has the Federal Reserve started raising rates just as the business cycles turns down? It’s a possibility.
In short, then, there are few reasons to believe oil supplies are about to reduce in coming months and a couple of reasons to think demand could falter. And this is at a moment when the world is running out of places to store current stockpiles of oil.
Sub-$30 wouldn’t last for long, one suspects. But, until the Saudis decide they’ve had enough of these prices, it’s hard to see what will alter the current plotline. At the moment, Saudi Arabia isn’t even trying to talk up prices, let alone curbing production.
Shelling out to save face
How goes Shell’s planned £36bn purchase of BG Group in this climate? Logically, you’d think the deal would be dead in the water since the terms were negotiated last April, when a barrel of Brent fetched $65.
As every can investor can see, BG’s shareholders are getting the better end of this transaction, and then some. If the talks were happening today, the Shell chief executive, Ben van Beurden, would not dream of offering 383p in cash plus shares currently worth 670p, the terms on which its shareholders will vote on later this month. That £10.53-a-share offer compares to BG’s share price a year ago of 800p, which might be 700p-ish today without a bid on the table.
The remarkable fact, however, is that protests from Shell’s shareholders about an apparent giveaway of billions of pounds of value haven’t risen above murmuring from the likes of David Cumming at Standard Life. Why not?
Some fund managers own both stocks, so can take the view that what they lose on Shell they gain on BG. Others may be persuaded by Shell’s argument that it has spotted extra savings and the cash arithmetic now works once oil returns to $50, rather than the $70 figure cited at the outset.
But one suspects that the main explanation for fund managers’ near-silence is Shell’s status as a global titan whose board cannot be embarrassed into seeking a last-minute renegotiation of terms. That is depressing. Fund managers are not paid to be poodles.
Priory purchase brings policy problem
If Labour MPs ever tire of internal squabbling and decide to return to day-to-day politics, here’s a deal to complain about: the purchase of Priory Group, the chain of private hospitals, by Acadia Healthcare of the US.
The deal, unveiled earlier this week, is worth £1.28bn plus shares worth £230m and looks very good point of the view of the seller, private equity group Advent International. But it raises competition issues – and public policy questions – that are being ignored.
Acadia already owns Partnerships in Care in the UK, a rival to Priory, which it bought for almost £400m in June 2014. After the latest acquisition, Acadia will control about 50% of the independent – or non-NHS – market for psychiatric care in the UK.
What’s the problem, it might be argued, won’t the NHS still dominate the market? Well, yes, but the NHS is also obliged to buy mental health services from outside when it can’t cope with demand itself. There would seem to be a real risk that the NHS ends up outsourcing to a highly concentrated market where it lacks pricing power. No wonder Acadia’s chief executive, Joey Jacobs, likes the “favourable industry dynamics” in the UK.
If the opposition can’t see the potential problem, the Competition and Markets Authority should. Indeed, one hopes alarm bells are already ringing at the competition regulator.
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