Un­cer­tainty is the only con­stant for oil mar­kets

The Pak Banker - - OPINION - Saadal­lah Al Fathis

AS I write, the Opec bas­ket of crude price stands at $23.85 (Dh87.53) a bar­rel, down from $110 a bar­rel in June 2014, prior to its' - or some of its mem­bers' - pol­icy to chase mar­ket share. The cor­re­spond­ing prices for Brent and WTI are $28.76 and $28.46 a bar­rel, re­spec­tively. The mar­ket is prob­a­bly head­ing to­wards the promised land of $20 a bar­rel, a level the Saudi oil min­is­ter Ali Al Nuaimi said in 2014 would not per­suade Opec - or Saudi Ara­bia - to cut pro­duc­tion. The rea­son for the slide is that the mar­ket is in a state of huge im­bal­ance and it has been so since the se­cond-half of 2014. Opec's pro­duc­tion has reached un­prece­dented lev­els and forc­ing sup­plies to far ex­ceed de­mand.

Ac­cord­ing to Opec's Jan­uary Oil Mar­ket Re­port, mem­ber coun­tries' crude oil pro­duc­tion in 2015 was 31.8 mil­lion bar­rels a day (mbd) while that re­quired to bal­ance the mar­ket was 29.9mbd. The dif­fer- ence ob­vi­ously went into stor­age, es­pe­cially in the OECD coun­tries.

In Novem­ber, OECD's com­mer­cial stocks were at 2.96 bil­lion bar­rels (mb), "around 231mb higher than the same time one year ago and 267mb above the lat­est five-year av­er­age", ac­cord­ing to Opec. The In­ter­na­tional En­ergy Agency (IEA) said that stock- pil­ing will con­tinue at least un­til the end of 2016 and at a lower rate.

The IEA es­ti­mates that "New and spare stor­age ca­pac­ity should be able to ac­com­mo­date the pro­jected ex­tra 300 mil­lion bar­rels of stocks." This dis­pelled the doubt about the avail­abil­ity of stor­age ca­pac­ity, with US tanks only 70 per cent full. Al­though oil de­mand in­creased by 1.53mbd and 1.8mbd ac­cord­ing to Opec and the IEA, the growth fore­cast for this year is more mod­est at 1.25mbd and 1.2mbd. The rea­son for this degra­da­tion in growth is mostly at­trib­uted to the global eco- nomic sit­u­a­tion, es­pe­cially in China where oil de­mand growth last year was 0.37mbd. (Bar­clays es­ti­mates it at 0.5mbd.) Both sources pro­ject growth this year at 0.3mbd only.

The de­pre­ci­a­tion of the Chi­nese cur­rency and the de­cline on the Shang­hai bourse are wor­ry­ing an­a­lysts, where the stock mar­ket hav­ing lost 40 per cent since June. This may very well trans­late into re­duced oil de­mand, with growth in the last months of 2015 be­ing mod­est and even a de­cline be­ing posted in Novem­ber.

The out­come of the bat­tle with US shale oil is not yet clear, though some de­cline in its pro­duc­tion over re­cent months is ev­i­dent. Pro­duc­ers of shale oil have proved to be re­silient as they im­proved ef­fi­ciency of op­er­a­tions and re­duced cost. Some were even able to con­vince banks to keep on fi­nanc­ing them.

Pi­o­neer Nat­u­ral Re­sources, one of the largest shale oil pro­duc­ers, is to get $1.4 bil­lion through new share is­sues to fi­nance its still prof­itable op­er­a­tions in Texas. The En­ergy In­for­ma­tion Ad­min­is­tra­tion re­ported that US pro­duc­tion peaked in April 2015 at 9.7mbd and fell to 9.3mbd by the end of the year and the fore­cast for 2016 is 8.8mbd. Pro­duc­tion of non-Opec crude is ex­pected to fall by 0.66mbd and 0.6mbd. To bal­ance the mar­ket, Opec pro­duc­tion can­not be more than 31.6mbd and 31.3mbd ac­cord­ing to Opec and IEA es­ti­mates. Opec pro­duc­tion in De­cem­ber was 32.2mbd.

The oil mar­ket is marred by un­cer­tain­ties, ex­ac­er­bated by fac­tors such as China's eco­nomic growth likely to de­cline to 6.4 per cent this year and much lower than the high growth rates of pre­vi­ous years. Oil pro­duc­tion may in­crease sub­stan­tially in Iraq, and even in Libya. It will def­i­nitely be so in Iran as the UN sanc­tions are lifted. The dol­lar's ap­pre­ci­a­tion is mak­ing oil more ex­pen­sive for all con­sumers, ex­cept in the US.

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