Uncertainty is the only constant for oil markets

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.