April 21, 2015 / 3:01 PM / 4 years ago

Oil to climb 'substantially' higher as cycle turns sharply: PIRA's Ross

NEW YORK (Reuters) - World oil prices will rise “substantially” in the coming months after hitting the bottom of a months-long rout several weeks ago, with a supply squeeze looming as early as this summer, according to PIRA Energy’s Gary Ross.

Pumpjacks taken out of production temporarily stand idle at a Hess site while new wells are fracked near Williston, North Dakota November 12, 2014. REUTERS/Andrew Cullen

The “magic of price” has caused a rapid resurgence in global oil demand and triggered a surprisingly steep collapse in the number of U.S. drilling rigs that may be more difficult to reverse than many expect, Ross, a founder and executive chairman of influential consultants PIRA Energy Group, told Reuters in an interview.

And Saudi Arabia’s spare production capacity has dwindled as the kingdom pumps oil at a record rate, leaving the global market facing a summer of higher demand and growing geopolitical risks with a spare supply cushion of as little as 700,000 barrels per day (bpd), or around 0.7 percent of the market.

“The world has been focused for the last six months on destroying supply,” Ross said on Monday. “Increasingly the mindset is going to change, they’ll have to start thinking about creating supply again, and that’s going to mean a lot higher prices than today. Substantially higher.”

To see a video of the interview: reut.rs/1DxWk93

PIRA, one of the first big energy consultancies to anticipate the tumble in oil prices last fall, is among others, including big commodity traders Gunvor and Vitol, in calling a bottom, despite U.S. crude stocks that have swollen to record levels more than 20 percent higher than last year.

“The balance is getting tighter and while we’ve accumulated quite a bit of inventory, and we may accumulate a bit more, the worst is pretty much over,” said Ross.

Beyond calling the bottom, however, Ross is taking a more bullish view than some analysts who have warned of a prolonged lull or a new slump to as low as $20.

“Prices are way too low; they can’t last, especially with such small spare capacity,” he said.

U.S. oil prices have rebounded some 35 percent, or as much as $15 a barrel, since hitting a six-year low of nearly $42 a barrel in mid-March, still too little to “turn around the freight train of declining rigs in the United States,” Ross said.

He declined to give PIRA’s specific price forecasts. On average, analysts surveyed by Reuters in March expected U.S. prices to average $59.20 a barrel this year; the highest forecast was for $75..

The dramatic emergence of the U.S. shale industry has fostered the notion that the intense, years-long boom and bust cycles that have plagued the global oil sector for decades may be changing, with thousands of fast-producing shale wells able to shorten the cycle and temper the peaks and troughs.

While the industry has slashed costs, staff and rigs more quickly than anticipated as oil prices more than halved since last summer, their ability to get back in gear may be tested as soon as this year as demand revives and reserves diminish.

Ross estimates that global spare production capacity has already fallen to just 1.2 million bpd, one of the thinnest cushions ever. And Saudi Arabia may need to pump another 500,000 to 600,000 bpd of crude this summer to meet domestic demand for additional power generation, shrinking it further.

Will shale drillers ride to the rescue?

“They’ve just cut 100,000 jobs,” Ross said. “You think those people are just waiting for a phone call to come back to work?”

Editing by Jonathan Oatis

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