Oil trade: Difficulties and opportunities

ABU DHABI. July 15. KAZINFORM A typical downturn cycle for demand for OPEC oil has already started this year and is expected to intensify next year. That will bring with it not only the usual bitter quarrels between the organization's member states on the tough issues of production discipline, but also how other producers will react to safeguard their own interest and help keep prices relatively high and stable.

The recent release of the monthly reports by both OPEC and its sister organization that groups the main consumers, the International Energy Agency (IEA) paints a clear picture of tough days ahead.

Though demand is expected to increase due to improved economic conditions after almost four years following the world financial and economic crises, supplies from non-OPEC producers are expected to grow as well, eating into the potential share of the market residual supplier, OPEC.

The July Monthly Market Report published by the organization expects that call on its crude next year will top 29.61 million barrels per day (bpd), which means a drop of 250,000 bpd, and that follows an anticipated drop of 420,000 bpd this year.

Moreover, such levels of call will put OPEC production at below its current level of 30.37 million bpd and the official ceiling of 30 million bpd.

More significantly with demand for OPEC oil in the coming fourth quarter expected to be around 30.55 million bpd and between the fourth quarter and the first quarter of next year, call on OPEC oil is expected to see a decline of 1.27 million bpd.

However, it has been noticed that there is some discrepancy in figures between those officially presented by the countries themselves and those generated from secondary sources like importers, shippers and so on.
For instance, official June submission amounted to 32.12 million bpd, or 1.7 million bpd more than those provided by secondary sources.

July figures follow the same pattern.

As is the case with official estimates of reserves there seems to be a tendency to inflate these figures.
Political crude calculation seems to play well in this respect.

A country like Iran loves to paint a picture that Western sanctions are not hurting its out as they hope and claim, while another country like Nigeria tries to send a message that insecurity and political turmoil has not affected its production atmosphere.

However, the central point is the rise of the non-OPEC supply by some 1.14 million bpd to reach a new peak of 55.06 million bpd - building on a gain of 980, 000 bpd this year.

The IEA on its part continue to attribute a bigger role to the US production of shale oil, which it said is changing the face of the oil market as it helps register the strongest increase in non-OPEC supply in two decades.

And this development has only one way to go: eating on the share of OPEC in two ways by absorbing most of growth in demand increase and even help reduce OPEC existing share.

That looks like repeating an old scenario experienced by the oil market before in the early 1980s, when OPEC was forced to acknowledge the new market realities and that it was no longer dictating the rules of game.

Accordingly it took the bitter bill of adjusting its production ceiling, reducing it and started allocating quotas for member countries as well as slashing its official bench market price for the first time in its history.
A lot took place in the market since then and OPEC is no longer keen on defending an official price, but instead concentrating on its market share, which has doubled over more than two decades.
However, with the rise of new consumers in Asia and even the Middle East itself, both demand and prices rose to historical level crossing the $ 100 barrel mark. And that which had the great impact the new unconventional supplies of shale oil.
The US production of shale oil and gas, which stood at 1.5 million bpd last year, is estimated to top 5 million bpd in just five years, thus takes the US domestic production to its rosy period back in 1970.

But that was made possible with price of a barrel exceeding $ 85.
Still the new industry can do with a drop of 10 percent annually in reduced cost, but the question every one avoids is what is going to happen if OPEC refused to take the brunt and defend even unofficially a minimum level of a barrel price. Will the world see a return to a one digit price for the barrel of oil?

At that time, the US drops its orthodox belief in market forces and sent its vice president to convince Saudi Arabia to lead an effort to restore some stability to the market and rise up prices, which it did. On the background was the heavy losses incurred by the US oil industry.

It is time for all market players to sit and agree on ways to achieving market and price stability.


Currently reading