Crude oil — the saviour and the game changer

Oil prices awoke from their slumber few days back breaking out of a narrow trading range and plunging by more than 8 per cent.

Reasons behind the fall

US shale producers started to grow production again when crude prices first topped $50 a barrel in May 2016 after a two year price slump due to a global glut starting in mid 2014.

The inventories surged by 8.2 million barrels last week to a record 528.4 million barrels.

Also, the US drillers have added more than 280 oil rigs since the end of May lifting the rig count to 617, the highest since September 2015 with increased spending to take advantage of a recovery in crude prices since the Opec agreed to cut output late last year. It was on November 30, 2016 when Oil prices surged more than 8 per cent as Opec shocked the world and reached an agreement to cut production in Vienna.

After the continuous falling of prices bleeding the economies of oil producing countries Opec and other major oil producers including Russia reached a landmark agreement last year to cut its collective output down to 32.5 million barrels per day, a cut of about 1.2 million barrels per day from October levels. Non-Opec producers, including Russia, contributed for an addition cut of about 600,000 barrels per day totalling1.8 million barrels per day. GCC Oil producers responded to production limits religiously. And the prices reached $56 per barrel till recently.

Oman slashed 45,000 barrels a day as a part of the deal.

Crude prices rose by more than 14 per cent since the November pact.

Impact

According to sources, Oman’s oil production declined to 27.16 million barrels in February at the daily rate of 970,000 barrels, down by 0.09 per cent compared with January last.

Oman has seen the price of oil at $10 per barrel. Oman suffered on 2 counts - firstly on account of production cuts of 45,000 barrels per day and lower prices hovering around $49 per barrel.

Oman needs external financ- ing to meet its deficit and to check sustained erosion in foreign assets. It has a direct impact on widening of the fiscal deficit in 2016. The consolidated government fiscal balance recorded a deficit of OMR5.2 billion (22.6 per cent of gross domestic product) in 2016, widening from OMR4.2 billion (16.9 per cent of GDP) in 2015.

The 2017 budget will target narrowing of the fiscal deficit to OMR3 billion (11.9 per cent of GDP), based on an oil price assumption of $45 per barrel. The government plans to cover the 2017 fiscal gap with external and domestic borrowing.

Outlook

There seems to be a growing awareness that global oil markets are incredibly complex, and that there are so many moving parts that a single, simple solution is unlikely.

The larger issue is the inexorable relationship between stocks and prices. It is not so much about this week’s change in inventory. It is about how much inventory needs to be reduced and how long that will take in the most hopeful scenario.

According to the IEA, Iraq will increase its output to 5.4 million barrels per day by 2022, which is significantly higher than the earlier estimates of an increase to 4.6 million bpd by 2021. Similarly, Iran is expected to boost production by 400,000 bpd to reach 4.15 million bpd production in 2022. Iran has managed to increase its exports to 3 million bpd, its highest level since 1979.

With improved technology, the shale oil industry cut costs by 30 per cent over 2015 and by 22 per cent over the past year, which means that it is more profitable today compared to what it was before.

There does not appear to be any likelihood that shale producers are going to reduce production at these prices.

The trend is bearish. Nevertheless, with every major oil producer looking to boost production and the market still digesting the big increase in inventories the pressure on the oil prices is here to stay.

There seems to be a growing awareness that global oil markets are incredibly complex, and that there are so many moving parts that a single, simple solution is unlikely.

*The writer is the chief executive officer of Rakhyoot Group Holdings.