When Leonid Fedun first studied the oil market in 1978, he was a young officer in the Red Army asked to research the impact of prices on NATO forces. More than three decades later, the billionaire shareholder in Russia’s second-largest oil company is still at it.
Fedun, 58 and vice-president of OAO Lukoil, says crude prices will rally quickly later in the year and may finish 2015 near $100 a barrel. The situation today, he says, bears little relation to the late 1980s when Saudi Arabia’s desire to hold onto market share kept prices low for almost five years.
“We expect a healthier market and I wouldn’t be surprised to see $80 to $100 by the end of the year,” Fedun said in an interview on Tuesday while visiting London to present Lukoil’s 2014 results to investors.
The rebound will be sharper than others predict – including BP Plc Chief Executive Officer Bob Dudley and Goldman Sachs Group Inc – because costs are higher relative to prices than in the 1980s, forcing more oil off the market faster, he said. In the earlier slump, low-cost output from young fields in the North Sea and Alaska maintained oversupply, according to Fedun, who wrote a research paper on the market at that time.
“Within five to six months, we’ll witness a dramatic drop in production,” he said, pointing to a fall-off in investment in US shale fields, Latin America and the North Sea.
Even in Russia, where lower drilling costs mean relatively stable production, output this year may fall as much as 4 percent, Fedun said.
Market upended
In November, on the day that Saudi Arabia upended the global oil market by persuading the Organization of Petroleum Exporting Countries to keep supply unchanged, Fedun said Riyadh’s policy was aimed at crashing the US shale industry, where he compared growth to the dotcom boom.
Three months later, Saudi Arabia, the world’s largest crude exporter, can consider the policy a success as the number of rigs operating in US fields declines sharply, he said.
Benchmark US oil prices dropped from more than $100 a barrel in June to $43.58 on Jan 29. Since then, they’ve recovered to $50 a barrel.
BP’s Dudley said last month the price could stay below $60 a barrel for as long as three years and $100 oil wouldn’t return for a “long time”. Goldman Sachs said on Feb 19 that crude may relapse back to $39 a barrel.
Whatever direction the market takes, Fedun, who joined with CEO Vagit Alekperov in the 1990s to build Lukoil from the wreckage of the Soviet oil industry, said Russia is more resilient to lower prices than in the late 1980s.
Then, as he came toward the end of his army career, he saw how the state-run economic system, which had little flexibility on exchange rates or investment, caused production to slump by half by the early 1990s.
“We don’t see any of those factors today,” he said.
A worker oversees the loading of oil supplies into freight wagons at an oil refinery operated by OAO Lukoil, in Nizhny Novgorod, Russia. Leonid Fedun, a billionaire shareholder in Lukoil, Russia’s second-largest oil company, says crude prices may finish 2015 near $100 a barrel. Bloomberg
(China Daily 03/05/2015 page17)
