‘Oil could start fall­ing till $42 a bar­rel’

Last year’s pact be­tween mem­bers of Opec, the petro ex­porters’ car­tel, and non-mem­bers to cut crude oil pro­duc­tion has faced sev­eral chal­lenges. AB­HISHEK DESH­PANDE, chief en­ergy an­a­lyst at Lon­don-based Natixis Global Com­modi­ties Mar­kets Re­search, tells Ra


Chief en­ergy an­a­lyst, Natixis Global Com­modi­ties Mar­kets Re­search Is it Opec mem­bers’ breach of out­put quo­tas or shale oil sup­ply in­crease that is push­ing oil prices down? Both. Shale pro­duc­tion got re­vived due to US pro­duc­ers re­duc­ing costs and hedg­ing 2017 pro­duc­tion at el­e­vated prices af­ter the Opec and non-Opec deal. And, there is ris­ing pro­duc­tion from Opec mem­bers whose out­put was never capped, par­tic­u­larly Libya and Nige­ria. With that ex­cess oil, other Opec mem­bers’ com­pli­ance has also started to go down. Com­pli­ance fa­tigue is set­ting in — this is the worst of the worst sce­nario for Opec, with low oil prices and also lower ex­port. Spec­u­la­tive in­vestors are also tread­ing care­fully be­fore get­ting into large po­si­tions in oil. Opec met on Mon­day and de­cided to tighten loose ends in the pro­duc­tion cut agree­ment. How will that im­pact prices? Where do you see prices by the year-end for Brent and WTI (crude oils)? With­out caps and po­ten­tially cuts from Libya, Nige­ria and Iran, and good lev­els of com­pli­ance from other Opec mem­bers, oil prices might take longer to rise. We ex­pect in our cen­tral sce­nario for oil prices to av­er­age around $55 a bar­rel for Brent. But, if Nige­ria and Libya con­tinue to add oil, fol­lowed by Opec mem­bers’ com­pli­ance re­duc­ing even fur­ther, we will grav­i­tate more to­wards our lower case sce­nario of a Brent av­er­age of $42 a bar­rel. How are fi­nan­cial in­vestors play­ing mar­ket? They’d re­duced their net longs by over 500 mil­lion bar­rels worth of Brent and WTI con­tracts be­tween Fe­bru­ary and June.

In July, how­ever, there had been a small pickup in net longs by spec­u­la­tors, up by 120 mn bar­rels of con­tracts com­bined for Brent and WTI, though this is still nowhere close to the lev­els seen in Fe­bru­ary. If there was a sign of a sus­tained draw­down from a bal­anced mar­ket, we might see a surge in net longs, which could drive up prices quickly. For now, how­ever, that risk re­mains lim­ited, given that so much oil is still hit­ting the mar­kets. How will oil prices re­main­ing un­der check af­fect the re­fin­ing busi­ness and re­fined prod­ucts' prices? Re­finer­ies in gen­eral had great years in 2015 and 2016. In 2017, so far, they con­tinue to en­joy healthy mar­gins world­wide, due to ro­bust de­mand and oil prices not ris­ing so quickly. Equally, it is per­haps not as good as in pre­vi­ous years for some re­gions, due to pres­sure from ex­cess prod­ucts in stor­age at the be­gin­ning of the year. When prices were around $30, In­dia and China built re­serves. Do you see a re­peat of that and if so, at what level will re­serves’ build­ing de­mand come in? Strate­gic re­serves re­main key to In­dia and China. This is de­pen­dent both on oil prices and avail­able stor­age. China has built its phase-1 and phase-2 of strate­gic re­serve ca­pac­i­ties; it now has over 250 mn bar­rels in re­serve. In­dia is yet be­hind the curve but is rapidly build­ing its own.

Cur­rently, the planned ca­pac­ity to be built for In­dia is around 110 mn bar­rels, of which 38 mn has been filled. Both In­dia and China can im­port more crude to fill some of their strate­gic re­serves but with prices re­main­ing low, there might be less in­cli­na­tion in fill­ing this up quickly, con­trary to what one might think.

With­out caps and po­ten­tially cuts from Libya, Nige­ria and Iran, and good lev­els of com­pli­ance from other Opec mem­bers, oil prices might take longer to rise

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