Oil Price fully pricing in fundamentals: Dev Sanyal

The biggest question on everybody's minds here in Davos this year is what happens to oil prices. Do they head lower? Is it $10? Or is it time that after a complete breakdown, disaster, prices rebound and we get a meaningful rebound in 2016? Who better to answer that question but the top boss at British Petroleum, Dave. He's executive president, he's also part of the executive board at BP, responsible for strategy, responsible for Europe and Asia, and he's sitting down with me to take some of those questions. Dave, thanks very much for your time, great to have you here. So, simple question: oil up or down?

Well, for now I think it's fair to say that as we said last year in Davos, literally a year ago, that the prices effectively are lower because they're reflecting fundamentals. And what we're seeing today is that there is an excess amount of supply. And in the context of that excess amount of supply, I think it's fair to say the narrative today looks like a lower price regime. That of course could change in the future as there is a rebalancing in the market.

Is it demand? How much of it is demand? If you were to put numbers to it, lack of demand and excess supply, how would you put it?

Well, I think there are two things happening in the oil market today. The way I describe it is: fundamentals are being fully priced into oil, and secondarily, what is happening is that there is essentially no geopolitical premium in the price of oil. In other words, world peace is fully priced into oil. What we've seen last year is that demand actually rose by anything between 1.8 to 1.9 million barrels a day, the numbers — world demand. And it depends on which source you use. Our own estimates suggest that the overall supply and demand balance last year was skewed in favor of supply, but demand effectively rose by 1.8 million barrels a day. That was, by the way, a 10-year high mark in terms of growth in demand. What we are seeing this year, forecasts are suggesting a 1.5 million barrels a day increase in global demand. So the reality is that the consumer is actually making choices. We are seeing more demand last year and this year, but of course the reality is that there is an excess amount of supply.

And it's always about the incremental supply, right? Which is available, which is not there in the market but which could be made available at any point?

The reality is that there is actually a lot of supply available. Inventories are at a very high level. So what we have seen as a result of the actions in OPEC is that there has been a growth in OPEC production. OPEC was very stable up until last year for the preceding eight years or so at around 30 million barrels a day. Since last year, we've seen Saudi Arabia ramp up production to the high-water mark in terms of their own production history. You've seen Iraq ramp up production, and we've of course also seen the shale revolution which is taking place in the United States over the course of the last decade really coming to full steam, if you will. So that's resulted in a lot of supply coming into the market. Inventory levels are also very high — in the OECD, inventory levels are today at a high-water mark as well. So the fact of the matter is, you've got a very robust picture in terms of demand growth, but you've actually got an even more robust picture in terms of supply growth as well as the inventory position. This is of course going to be compounded by what is happening with the talks in Iran and the very positive sentiment, if you will, on the nuclear deal, which of course means that there will be Iranian production coming to market.

Absolutely. One would imagine that Saudi Arabia and OPEC would be curbing production, cutting back production. The theory was that they wanted to sort of hurt US shale, and US shale has proven to be remarkably resilient, some would say, even though oil prices have come way off from where they were six months back. What's your perspective? You think OPEC will act, Saudi Arabia will act, and how much can that influence at the margin the price of oil? How much of that can be a trigger?

I think Paul Samuelson famously said, 'If you forecast, forecast often.' So I think it's very hard to sort of forecast what exactly will happen. But I think when you take a step back, what OPEC is doing is perfectly rational. The general thesis is a very simple one, which is: why should we, as the lowest-cost producers, essentially shutter in production? That should be the task of the high-cost producers. So their strategy is an economic, rational one. It's a strategy that was essentially formulated and enacted upon in the late '80s when we had a similar supply-driven shock. Since then, there have been actually four other shocks, but they were all demand-related rather than supply-related. So it's hard to say what OPEC will specifically do, but so far they have been very resilient with their strategy, which is essentially around ensuring that high-cost producers take different kinds of actions rather than the low-cost producers.

Right, which is Saudi Arabia and other OPEC members?

Absolutely.

And how much of that strategy has been successful, you think?

Well, I think you are seeing a fall-off in shale production. I mean, nowhere near the pace some were forecasting this time in Davos last year, where effectively people were forecasting quite a rapid shuttering of US production. But we are seeing rig counts have come down quite dramatically, from over 1,600 to sort of 500 or so. We have actually seen production levels come down. So when I talk about rebalancing, effectively you are seeing a growth in demand, you're also seeing actually some of the supply coming down in the United States, but that of course being offset by the potential of Iranian production. Which is why there is a potential this year, based on the fundamental analysis, that it could be a year of two halves. What the exact price level will be is hard to obviously say.

But is it possible that by the end of the year we reach a situation where demand overwhelms supply? Is it possible?

Nothing is impossible, but I think it's fair to say that when you have a shock which is caused by an excess amount of supply, demand is not the antidote. It is a factor, but effectively production actually has to be shuttered in, supply has to dampen, for the narrative to change. So that's I think one of the key factors as one thinks about this shock versus say in 2008, or indeed in the previous decade at the end of the 1990s or the beginning of the 1990s, where you had shocks led by effectively a damping of demand which then got stimulated, if you will, by governments. Whereas in this particular scenario, demand is a factor, but the fact of the matter is supply has to actually be dampened. And of course, as you think about the environment in the second half, you can think about the fundamentals with demand and supply — because the growth in demand and the supply easing off, subject to what of course OPEC and other factors there are out there including geopolitics — but then you've also got the dampening effect of the inventory levels, which are actually at very high levels as I said in the OECD, but also generally.

Just one last question: what are BP's plans now in India?

Well, we have had a long-standing presence in India. We've had a presence through Castrol, which is a great brand in India, and it's a very vibrant business. It's one of our growth engines actually for Castrol worldwide. We have around 8,500 people who are employed by BP in India in a variety of ventures — from Castrol, which is a consumer goods business, to our businesses which are involved in shipping, also in information technology, as well as in sort of high-end technology services. We also of course made a very big investment in India in the deep water in the Bay of Bengal, in partnership with Reliance. We are very committed to seeing that potential being realized because we see an extraordinary opportunity in India for India to essentially create a substitution for India's imports. India's imports today for energy is one of the highest — in fact, it is the highest amongst the —

So some of it substituted by local production, right?

Absolutely. So you remain committed to that plan?

Absolutely.

I think the key is going to be to make sure that the price levels reflect the economic conditions that will allow us to monetize this great opportunity. But when you look at the fundamentals in India over the next 20 years, we see gas demand rising by 155%. We see energy demand rising by 136%. The reality is that India is growing, and as there is economic development, energy is a very important part of stimulating that growth and that economic narrative story there.

Thank you very much for your time.

Pleasure speaking with you. Thank you.