Hop­ing the oil price spike is here to stay

The Pak Banker - - OPINION - Saadal­lah Al Fathi

WHEN crude prices slowly de­te­ri­o­rated from $120 a bar­rel to near the $20s in al­most 18 months, why should any­body be sur­prised if they went up few dol­lars in the last few days? But the more im­por­tant ques­tion is whether this is a re­bound or just an­other bump in the road of a roller-coaster mar­ket.

Like al­ways, an­a­lysts are di­vided. There are those who be­lieve that the re­bound is real and there is only one way for prices and that is a re­cov­ery to some $50 a bar­rel. They say in­vestors are "fo­cused on de­clines in oil drilling and pin­ning their hopes on a freeze in out­put by ma­jor pro­duc­ers", ac­cord­ing to the New York Times. In rel­a­tive terms, the in­crease in the price of the Opec (Or­gan­i­sa­tion of Pe­tro­leum Ex­port­ing Coun­tries) Ref­er­ence Bas­ket (ORB) from $25.21 a bar­rel on Fe­bru­ary 10 to $35.22 a bar­rel on March 10 is un­de­ni­ably sig­nif­i­cant, but has to be com­pared with a 21 per cent de­cline in Jan­uary. The same trend is seen for other bench­marks and Brent tested more the $40 a bar­rel. But the rise in prices wasn't as smooth as some peo­ple like to think and there were many days of de­clin­ing prices in the process, sug­gest­ing the mar­ket is still search­ing for di­rec­tion and "that the re­cent mar­ket rally ap­pears un­sus­tain­able", ac­cord­ing to the Wall Street Jour­nal. Fun­da­men­tally, noth­ing has changed to bring about this pos­i­tive sen­ti­ment in the mar­ket. The growth in de­mand for this year is still lower that in the last and is 1.25 mil­lion bar­rels per day (bpd) ac­cord­ing to Opec and 1.2 mil­lion bpd ac­cord­ing to IEA. Non-Opec sup­plies are seen to de­cline by 0.7 mil­lion bpd by Opec and 0.6 mil­lion bpd by IEA.

World eco­nomic growth has been re­vised down­ward to 3.2 per cent as a re­sult of lower fore­casts in OECD, China and In­dia, which may bring fur­ther re­vi­sion on oil de­mand growth later. Crude oil and prod­ucts stocks are still at record highs whereas OECD com­mer­cial stocks stood at 3,012 mil­lion bar­rels at the end of 2015, higher by 350 mil­lion bar­rels over the last five-year av­er­age. Last year the sur­plus that went into stocks was 2 mil­lion bpd and more will do so this year al­beit at a lower rate.

Opec crude oil pro­duc­tion rose in Jan­uary to 32.33- and 32.63 mil­lion bpd, ac­cord­ing to Opec and IEA re­spec­tively, and about 1.7 mil­lion bpd higher than at the same time last year. All the fun­da­men­tals make us doubt whether the lat­est trend of oil prices is go­ing to con­tinue. In its Fe­bru­ary "Oil Mar­ket Re­port", the IEA in dis­cussing the price ap­pre­ci­a­tion in the se­cond half of Jan­uary said that this may be a "false dawn". It said that pin­ning the hope on pro­duc­ers' pro­duc­tion cut­backs is spec­u­la­tion and that the like­li­hood of co­or­di­nated cuts is low. I don't know whether the IEA would mod­ify its stance af­ter the freeze agreed by Saudi Ara­bia and Rus­sia and a few other Opec coun­tries, but there is no way to say that the freeze, as good as it is, is go­ing to change fun­da­men­tal fac­tors sig­nif­i­cantly.

There is no way that Iran will freeze its pro­duc­tion and Iraq, with its bind­ing con­tracts with oil com­pa­nies likely to in­crease pro­duc­tion though at a slower rate than last year. The fall in the pro­duc­tion of high cost oil - such as tight oil in the US - is forth­com­ing but at a slow rate. US oil pro­duc­tion in De­cem­ber fell to 9.26 mil­lion bpd from a peak of 9.69 mil­lion bpd in April 2015. Stocks are likely to con­tinue ris­ing to the end of 2016 and this is weigh­ing heav­ily on the mar­ket.

Ramzi Sal­man, the for­mer deputy sec­re­tary-gen­eral of Opec, said in an ar­ti­cle that "with­out re­mov­ing the glut and putting a stop to price dis­count­ing in the pro­duc­ers' fight for mar­ket share, there will be no so­lu­tion."

He pointed out that the high prices of the 1970s "made the de­vel­op­ment of the North Sea and Alaska", which was "fol­lowed by a col­lapse in the mid-80s to prices in the sin­gle dig­its." The same is re­peated when oil prices were al­lowed to ap­proach $150 a bar­rel to "ac­cel­er­ate the de­vel­op­ment of costly un­con­ven­tional oil and gas re­sources, in­clud­ing those from shale, oil sands and out of very deep wa­ters." The crash of 2014 came as a re­sult.

The agreed freeze in oil pro­duc­tion "ir­re­spec­tive of how many pro­duc­ers par­tic­i­pate in the freeze, {will al­low} nat­u­ral pro­duc­tion ca­pac­ity de­cline {which} will be the most im­por­tant fac­tor in re­duc­ing the gap be­tween sup­ply and de­mand" but "strict ad­her­ence to the rules will be of ut­most im­por­tance".

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.