Oil: Volatil­ity is the norm

The Pak Banker - - OPINION - Tamer El Zayat

THE re­cent daily and weekly gy­ra­tions in oil prices have made it ex­tremely dif­fi­cult to as­cer­tain the trends and fac­tors at play, with some an­a­lysts fo­cus­ing on the wind­ing/un­wind­ing of spec­u­la­tive po­si­tions. Yet, fun­da­men­tally-speak­ing, el­e­vated pro­duc­tion lev­els, de­cel­er­at­ing de­mand, and record high in­ven­to­ries have been the drags that sup­pressed oil prices around a tight range of $26-$36 per bar­rel (bbl) dur­ing the last cou­ple of weeks. Growth dy­nam­ics per­tain­ing to emerg­ing mar­kets, in par­tic­u­lar China, and pro­duc­tion fac­tors re­lat­ing to OPEC have un­der­pinned the bear­ish views and the lower-for-longer ex­pec­ta­tions of many an­a­lysts ob­serv­ing the en­ergy space. The lack of com­pli­ance among OPEC mem­bers that pro­duced above the 30 mil­lion bar­rels per day (mbd) quota for the 20th month in a row re­mains a drag, es­pe­cially that the group lacks a uni­fied front. Iraq and Iran are adamant in pro­duc­ing as much as they can to make up for the lost years, a sit­u­a­tion that is ma­te­ri­al­iz­ing with Iraq in­creas­ing its out­put that had reached 4.25 mbd this Jan­uary, around 0.9 mbd higher than lev­els wit­nessed in early 2015. Lift­ing the sanc­tions im­posed in July 2012 on Iran is also ex­pected to bring an ad­di­tional 500 thou­sand bar­rels a day dur­ing 1H2016, which will keep OPEC's pro­duc­tion above the 32 mbd mark.

As such, and given the ex­pec­ta­tions of more sup­ply go­ing for­ward, the King­dom and Rus­sia's ini­tia­tive to freeze pro­duc­tion at Jan­uary lev­els re­ceived a muted mar­ket re­sponse, with mar­ket par­tic­i­pants pre­fer­ring a mean­ing­ful cut in­stead, es­pe­cially that both coun­tries are pro­duc­ing above the 10 mbd mark, a multi-year high. Even though non-OPEC mem­bers and high-cost pro­duc­ers will con­tinue to be pres­sured this year, the an­tic­i­pated de­cline in their pro­duc­tion will not off­set OPEC's over quota re­al­ity. The IEA, EIA and OPEC have fore­casted a de­cline in non-OPEC sup­ply by around 600,000 bar­rels a day, the first an­nual de­crease since 2008, largely due to the steeper de­cline in US shale pro­duc­tion. The IEA pre­dicted in its lat­est re­port that com­pa­nies op­er­at­ing in US shale for­ma­tions will re­duce pro­duc­tion by a record 600,000 bar­rels a day, which un­der­scores the chal­leng­ing en­vi­ron­ment even af­ter slash­ing cap­i­tal spend­ing, lay­ing off work­ers and fo­cus­ing on the most pro­duc­tive ar­eas. Nev­er­the­less, their abil­ity to main­tain el­e­vated lev­els of pro­duc­tion de­spite the 80 per­cent plunge in rig counts is a tes­ti­mony of their tech­ni­cal prow­ess and abil­ity to turn the taps once oil prices re­cover. On the de­mand side, China is ex­pected to mod­er­ate, with growth re­main­ing below 7 per­cent for 2016 de­spite the myr­iad at­tempts to re­duce in­ter­est rates, re­serve re­quire­ments and de­value the Yuan in or­der to spur busi­ness ac­tiv­ity.

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