Greece | Athens : When I wrote that a weaker crude oil price was in the cards for the second half of 2014 and into 2015 a year ago, I did not expect the nearly 50% plunge in prices since mid-summer.
“Looking at trend of supply and demand, there is downward pressure on the price of oil exactly because demand is sluggish, even Chinese demand. On the other hand we have more and more supply coming in the global oil market,” London-based energy expert Manouchehr Takin told New Europe.
Chris Weafer, a senior partner at Macro-Advisory in Moscow, said he expects the price of Brent to weaken further in the early part of 2015 but to start recovering in the summer or autumn.
“Given the fragility of the global economy I don’t expect to see any upward revision to forecast demand growth for the coming year. Quite likely we will see a demand growth reduction in the coming months as emerging economies struggle to boost growth. So the only way that the price will recover is if there is a cut in supply,” Weafer told New Europe.
That really depends on the Organization of Petroleum Exporting Countries (OPEC), Weafer said, noting that he does not see any major decline in existing production from either US shale or from the non-OPEC producers.
The current oil price has already slowed investment into new US shale projects, and that will slow the expected pace of future growth, but existing wells are mostly profitable on a marginal cost basis and, therefore, should continue to operate, Weafer said.
Takin said shale oil is a major factor as well as more oil from Iran and Iraq. “The political sanctions on Iran would ultimately be lifted hopefully in 2015, if not in one go, step by step so Iranian oil would come into the market,” Takin said.
He also predicted that the impasse between the Iraqi government and the Kurdish region will be resolved, noting that political negotiations have started and the investment that is being made in the Kurdish region and the capacity that is being developed can be exported.
He added that the Islamic State, also called ISIS or ISIL does not seem to have an impact on the export of oil from Iraq and the Kurdish region.
Weafer said it is nonsense to say that Saudi or other Arab Gulf producers are colluding with the US to hurt Russia and Iran. “OPEC has always known that Russia would never cut production and will always pump at maximum no matter what the price of crude. At the current oil price Saudi’s daily budget shortfall, i.e. to breakeven, is approximately $200 million. That’s an expensive favour to do the US – or anyone,” Weafer said.
“Reminding US shale investors that prices can go down as well as up and twisting the financial pressure on Iran are satisfying side benefits for Saudi, UAE and Kuwait. But this issue appears to be mostly about getting all member states to share in the required price supporting cuts. All three of these states, historically known as the ‘swing-producers’ have considerably more reserves than the others and can survive low oil for longer,” Weafer said.
Essentially, OPEC now needs to cut 1.5 to 2 million barrels from existing production but Saudi Arabia proved unwilling to arrest the slide in oil prices in recent months.
Fadel Gheit, a senior analyst at Oppenheimer in New York, told New Europe that if the oil prices remain low for another six months most of the oil producers will finally listen to what Riyadh wants to do. “Saudi Arabia is the de facto leader in OPEC but more important than that they basically have the ability to really crash oil prices if they want, which they have, and also they can send oil prices up $20-$30 in a few weeks by cutting the production by 2-3 million barrels, which they can do,” Gheit said. But every time Saudi Arabia has done that in the past other OPEC members stepped up their production and basically stole their market share, he said, adding that non-OPEC member Russia doesn’t even pay attention at all at Saudi Arabia and the rest of OPEC and has its own agenda.
Weafer agreed that there is only so much financial pain that all of the OPEC member states can, or are willing to accept. “Hence I believe that the further the price of crude sinks the more likely we will see emergency action from OPEC member states. Possibly in the spring or early summer at latest. If the price collapses to $50 or lower over the short term then we may see that action being forced much sooner,” Weafer said.
“Otherwise it would take an escalation in the Libyan civil war, i.e. to stop exports again, or the threatened economic collapse in Venezuela, which would also start to cut oil operations, or some act of terrorism against a major oil facility in the Middle East,” he added.
Oil prices should not have exceeded $60 on the way up and oil prices should not go below $60 on the way down, Gheit said. “Oil prices should be $65-75 – this is what I call the sweet spot. This is where you will have enough oil in the market to meet demand. And to help economic recovery you will have also sufficient profit for oil exporters and oil producers to extract additional capital to continue to bring or to replace oil that has been taken from the ground. Unfortunately, because of a lot of factors, including financial speculation, when oil prices go up they overheat, when prices go down they over-correct so there is no happy medium. I would not rule out $55 oil or $85 oil but realistically speaking oil prices should stabilise in a narrower range around $70,” Gheit said.
Turning to EU-Russia energy relations in 2015, Weafer said he does not see any risk of Russia cutting any gas supplies to any EU country. Russia has no made it very clear that it will handle gas relations with Ukraine as a straightforward relationship between a utility supplier and a previously delinquent customer. If Ukraine pays for the gas up front it will get supply. If it does not pay in advance then Russia will cut the supply. Just as any other utility company in the world would do, he said.
“In the event that gas supplies to Ukraine are cut, I do not see any risk to transit supplies to the EU as happened in 2006 and 2009,” Weafer said, adding that Ukraine now desperately needs additional financial aid from the EU and the International Monetary Fund (IMF) and also has a much closer relationship with Brussels. It would not tamper with transit gas flows – as it did previously and that is why Russian gas monopoly Gazprom cut the gas flows though the pipeline entirely, Weafer explained.
“But I also think it unlikely that this situation of non-payment from Kiev will arise. The government in Kiev will soon start talks with international donors, principally the IMF and EU, and securing enough money to pay for its energy imports will be a big part of the new deal,” Weafer said.
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