Going mad over oil prices

The other half of the equation, prices, is a different story. There are a number of sources who think oil prices will recover by 2020. There is a saying that he whom the Gods wish to destroy they first make predict the price of oil. Where oil price may go remains a very difficult issue to determine. An initiative is being undertaken by Noureddine Boutarfa, Algeria’s Energy Minister, to find consensus among OPEC and non-OPEC members about the need to stabilize the oil market to support prices. In an informal meeting in
Algiers last month, OPEC, the 14-member oil cartel, agreed to cut up to 700,000 barrels a day from its combined output of about 33 million barrels, all aimed at stemming the global oil glut and lift oil prices.

Next week, the annual World Energy Congress will be held in Istanbul, where OPEC and non-OPEC producers will meet on the sidelines. There are non-OPEC members, for example Russia, whose cooperation is important. If they do not cooperate the deal can collapse and oil prices could potentially go much lower. It is a concern to any number of producers who require higher prices too break-even. Whether the OPEC members can arrive at a consensus and get nonOPEC members to agree is the key to stabilizing prices or even get them higher. We should note that market analysts are reporting that oil traders appear less confident of higher oil prices.

This has led to a reduction in their net long US crude futures and options positions for the second week in a row last week. Of course it was felt that the low prices experienced in the last six months would lead to the exit from the market of a number of producers, who almost universally gave such an impression last year. This has changed this year with both producers as well as service companies indicating that they are now in a position to return to growth at these much lower prices.

Such a change suggests that the exit that was hoped for which would have reduced supply and led to some increase in prices, may be much further off. So exit of suppliers to reduce supply does not seem to be on at this moment. Those readers who have followed the oil markets would observe US oil prices are entering their sixth month of trading roughly between $40 and $50 a barrel. The relative calm in the market reveals how US producers, whose booming output from shale-oil fields pushed the global market into oversupply in 2014, have influenced the market and changed the industry’s dynamics.

One of their key characteristics is that ability to quickly start or stop production. This has had a stabilizing effect on the market but at relatively lower prices. It is this characteristic that has led some in the industry to hold the view that oil prices are not expected to return to the heights experienced just over a year ago. It appears that China has slowed or stopped the purchase of crude for its strategic reserve. There is the possibility if the price of crude rises much, that the Chinese may decide to re-export some of the oil they bought cheaply over the past couple of years thus adding to the glut on the market. Bloomberg reported last week that there are 10 tankers loaded with North Sea crude that have not found buyers. It is unusual for more than one or two tankers to be anchoring, waiting to transfer their cargo.

This uptick in what is essentially oil sitting in floating storage, in spite of oil field maintenance in the North Sea, suggests oil markets are still weak. We have also seen over the last week reports of a rise in Iranian exports that have swelled the global supply. The reality is that the futures market has returned to contango. What this means is that current spot prices for crude are lower than futures prices. A forward curve in contango indicates an oversupplied market where cargoes to be delivered immediately sell at lower prices than those that are for a later delivery. Of course there are also the mixed signals about oil and gas rigs that are in operation and the implications for prices.

There are a number of factors that can lead to a reversal of market conditions and see excess demand lead to higher prices. We have sought to bring to the fore those issues that we need to be aware of that can have a dampening effect on oil and gas prices. Optimism of the return to high revenues from price increase requires far greater care in the conclusions we arrive at.