It’s all about oil – that’s the sweet crude truth!

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­cent de­clines in the price of crude oil have thrown ev­ery­one for a loop. That oil plum­meted to $32 per bar­rel in the first week of Jan­uary is a grim re­minder that we’re not out of the woods just yet. The com­mod­ity price rout that hit hard in 2015 is back with a vengeance and this time it’s tak­ing no pris­on­ers. China has en­dured two mas­sive stock mar­ket shut­downs – one on Mon­day, Jan­uary 4, and an­other on Thurs­day, Jan­uary 7. Th­ese are re­minders that the pri­mary stress fac­tors re­main in place and that a Chi­nese re­cov­ery is nowhere to be seen. Oil prices re­cently bounced back from 12-year lows, set­tling a sliver above $34 per bar­rel. A big part of the rea­son for the on­go­ing weak­ness in oil prices is the re­silience of WTI crude oil pro­duc­ers in the US.

Even as prices con­tinue to slide, shale oil pro­duc­ers are main­tain­ing out­put ca­pac­ity – feed­ing the sup­ply glut that is drag­ging prices lower. The cur­rent price of crude oil is un­sus­tain­able for US pro­duc­ers and many OPEC coun­tries too. How­ever, nei­ther side is pre­pared to cede mar­ket share to the other. The re­cent re­bound in the oil price is not some­thing that an­a­lysts should read too much into how­ever.

The tech­ni­cal cor­rec­tion is a once-off event that does not make the case for a com­pelling ar­gu­ment in favour of oil price in­creases. The fun­da­men­tals of the mar­ket are struc­turally im­bal­anced. As long as China weak­ness per­sists, global de­mand re­mains weak, over­sup­ply con­tin­ues, and the USD re­mains strong we are go­ing to see per­sis­tent weak­ness in crude oil prices. to hap­pen: Ei­ther pro­duc­tion is cur­tailed so that de­mand can clear out­put at a higher price, or a shift in de­mand takes place and that raises prices. The lat­ter sce­nario could only oc­cur if China sud­denly had a re­mark­able re­cov­ery and started buy­ing en­ergy com­modi­ties like crude oil en masse. With sanc­tions on Iran about to lifted, the coun­try will be able to ex­port up to 500,000 bar­rels per day to in­ter­na­tional mar­kets. With over­sup­ply stand­ing at some 2 mil­lion BPD, this seems disin­gen­u­ous to the em­bat­tled en­ergy sec­tor.

Iran has a list of cus­tomers ready and will­ing to pur­chase its oil and this does not bode well for the price of WTI and Brent crude oil. There are even re­ports cir­cu­lat­ing that Saudi Ara­bia is lin­ing up buy­ers across Europe to pur­chase its crude oil in­stead of Iran’s crude oil as sim­mer­ing ten­sions be­tween th­ese two coun­tries con­tin­ues. Ow­ing to the in­clu­sion of Iran in global oil, it is pos­si­ble that oil prices could drop fur­ther.

An­a­lysts are con­vinced that given th­ese re­al­i­ties, prices could drop below the crit­i­cal $30 per bar­rel level and head into the mid-to-low $20 range. over­sup­ply is hav­ing on the price of crude.

In 2015, US shale oil and nat­u­ral gas pro­duc­ers and in­vestors en­dured a tor­rid time. Rapid and un­prece­dented de­clines took place and some 250,000 jobs were sac­ri­ficed in the process. The tense stand­off be­tween OPEC and shale oil pro­duc­ers has re­sulted in noth­ing but over­sup­ply and de­clin­ing rev­enues for ev­ery­one. The fact of the mat­ter is that OPEC will sim­ply not al­low oil prices to rise to $100 per bar­rel ever again. There is sim­ply too much at stake be­cause prices like that would em­power WTI crude pro­duc­ers and drive up their prof­its ac­cord­ingly. So, in­stead of ev­ery­one get­ting a slice of the cake, OPEC wants to starve out US oil pro­duc­ers with his­tor­i­cally low prices. If prices rise to $100 or there­abouts, we will see some in­ter­est­ing re­al­i­ties tak­ing shape:

- Do­mes­tic im­ports of OPEC oil will de­crease;

- Do­mes­tic pro­duc­tion of crude in­crease;

- Do­mes­tic con­sump­tion of crude oil will de­cline at those prices.

oil

will

This is a ques­tion that con­tin­ues to plague ca­sual ob­servers in this un­fold­ing saga. The fact of the mat­ter is that OPEC is the most sig­nif­i­cant marginal oil pro­ducer. What it does in terms of its 33% share of pro­duc­tion is tip the scales one way or the other. If OPEC al­lows prices to drop, it is squeez­ing out high cost pro­duc­ers (like the US) and caus­ing rig counts to di­min­ish. When OPEC be­lieves that enough higher cost pro­duc­ers have been squeezed out and global pro­duc­tion of oil is sub­stan­tially less prices will nat­u­rally be­gin ris­ing – even with­out a cut in out­put for OPEC. That is what the war of at­tri­tion is all about; OPEC is try­ing to lit­er­ally squeeze out other pro­duc­ers so that prices can rise and it can claim a larger slice of the global mar­ket. So how long is OPEC pre­pared to play the wait­ing game? This is the mil­lion dol­lar ques­tion but it could be any­where up to five years or more. By that stage, tremen­dous progress will have been made on elec­tricpow­ered ve­hi­cles and that will put a big dent in the de­mand for crude oil!

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