Will global oil glut re­bal­ance it­self?

The Pak Banker - - OPINION - Chen Jipeng

THE prices of crude oil are most likely to stay at rel­a­tively low lev­els in the near fu­ture as there are no signs of ma­jor pro­duc­ers tak­ing ac­tions to ease a se­vere oil glut yet. Nev­er­the­less, some en­ergy of­fi­cials and an­a­lysts said that they ex­pect the oil glut to grad­u­ally re­bal­ance it­self into 2016, though the high oil prices seen in the past may not be re­cov­ered soon. Ob­servers said that the low oil prices have in­creased fis­cal pres­sure on oil pro­duc­ers while ben­e­fit­ing oil im­porters, and that they may be a boon for the still frag­ile global econ­omy.

The West Texas In­ter­me­di­ate for Fe­bru­ary de­liv­ery moved down 97 cents to set­tle at 30.44 U.S. dol­lars a bar­rel on the New York Mer­can­tile Ex­change, while Brent crude for Fe­bru­ary de­liv­ery shed 69 cents to close at 30.86 dol­lars on the Lon­don ICE Fu­tures Ex­change. In­ter­na­tional oil prices have been trend­ing down­ward since 2014 as some of the oil pro­duc­ers in­creased their out­put and mem­bers of the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries (OPEC) flooded the global mar­ket with cheap crude in hopes of driv­ing out com­pet­ing sup­plies.

Speak­ing at the Sev­enth Gulf In­tel­li­gence UAE En­ergy Fo­rum meet­ing in Abu Dhabi on Tues­day, United Arab Emi­rates En­ergy Min­is­ter Suhail bin Mo­hamed al-Mazroui in­sisted that it is un­fair to ask only OPEC to cut its pro­duc­tion given that an es­ti­mated in­crease of 2.7 mil­lion bar­rels of per day in global sup­ply have come from coun­tries out­side the oil car­tel. He said that the mar­ket should be al­lowed to re­bal­ance it­self based on sup­ply and de­mand, which should also be OPEC's strat­egy.

The global oil sup­ply inched up to 96.9 mil­lion bar­rels per day in Novem­ber last year, which was 1.8 mil­lion bar­rels per day higher than the sup­ply a year ear­lier, ac­cord­ing to the In­ter­na­tional En­ergey Agency (IEA). Sep­a­rately, the United States En­ergy In­for­ma­tion Agency in its lat­est re­port puts the global oil sup­ply in 2015 at 95.71 mil­lion bar­rels per day on av­er­age, com­pared with the con­sump­tion of 93.77 mil­lion bar­rels per day. It ex­pects the oil glut to per­sist through 2016. OPEC has had an out­put tar­get, which was last set at 30 mil­lion bar­rels per day. How­ever, in re­al­ity the OPEC pro­duc­tion has been run­ning at an av­er­age of 31.7 mil­lion bar­rels per day, with Saudi Ara­bia and Iraq pump­ing at or near record rates, the IEA said.

The pres­sure on world oil prices also comes from the ex­pec­ta­tion that the sup­ply from Iran may hit the mar­ket this year and con­cerns that stock build­ing may slow as coun­tries near their stor­age ca­pac­ity lim­its. The strong U.S. dol­lar is seen to drive the global oil prices lower, too, as it makes oil more ex­pen­sive for buy­ers. Adam Long­son, head of en­ergy com­mod­ity re­search at Mor­gan Stan­ley, said that he sees it pos­si­ble for the oil prices to dip to as low as 20 dol­lars.

"You can ex­plain most of it by the U.S. dol­lar," he said, re­fer­ring to the fluc­tu­a­tions in global oil prices. OPEC seems still de­ter­mined to max­i­mize its low-cost sup­ply so as to drive out high-cost non-OPEC pro­duc­tion, re­gard­less of price. There are signs that the strat­egy is start­ing to work. The year-on-year growth in non-OPEC sup­ply has fallen to 0.3 mil­lion bar­rels per day in Novem­ber from 2.2 mil­lion bar­rels per day at the start of 2015.

The mo­men­tum in shale en­ergy in­vest­ment in the United States, which has been seen as a game changer, has shown signs of weak­en­ing, too. In its lat­est re­port, the U.S. En­ergy In­for­ma­tion Agency said that U.S. crude oil pro­duc­tion av­er­aged an es­ti­mated 9.4 mil­lion bar­rels per day in 2015, and it is fore­cast to av­er­age 8.7 mil­lion and 8.5 mil­lion bar­rels per day in 2016 and 2017, re­spec­tively. "The crude oil over-sup­ply is still ex­pected to re­bal­ance into 2016," Barn­abas Gan, an econ­o­mist at the OCBC Bank, said a re­port, pro­ject­ing in­ter­na­tional oil prices of 50 dol­lars per bar­rel at the end of 2016.

In that case, the oil prices are not likely to re­cover their past highs in the fore­see­able fu­ture, given that the shale firms may start adding new wells once the oil prices get above their break-even prices of around 60 dol­lars. It takes as few as one week to drill a new shale oil well. The low oil prices have in­creased fis­cal pres­sure on the oil-de­pen­dent coun­tries, in­clud­ing OPEC mem­bers. Rus­sia, too, suf­fers a con­trac­tion in its econ­omy, largely due to low oil prices. The OCBC Bank said the low oil prices have ben­e­fited the en­ergy im­porters that ac­count for a much larger share of world econ­omy. "De­spite the ab­sence of higher global growth in the last year, there are still ar­guably un­am­bigu­ous win­ners from the free-fall be­hav­ior in oil prices," Gan said in a re­port, nam­ing In­dia, South Korea, Ja­pan and China in Asia, and Italy, Spain and Greece in Europe.

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