As the crude oil price seems likely to drift lower during the coming
months than to rally, all eyes are on the Arab OPEC producers, wondering
when they will take action. Oil ministers from the Organization of Petroleum Exporting Countries
hold a production policy meeting in late November in Vienna.
“The lead up to that meeting, in terms of actual production, and the
decisions made there will have a direct impact on where oil trades over
the winter. Right now there is something of a perfect storm hitting the
price,” Chris Weafer, a senior partner with the Moscow-based Macro
Advisory, told New Europe in an e-mailed response on October 7.
Light, sweet crude for November delivery recently fell $1.74, or 2%,
to $87.11 a barrel on the New York Mercantile Exchange, the lowest
intraday level since April 2013. Brent recently fell $1.34, or 1.5%, to
$90.77 a barrel on ICE Futures Europe, at two-year intraday lows.
Regarding the falling oil price, Weafer noted that the steady
appreciation of the US dollar as the US Fed indicates it is getting
closer to raising interest rates. As oil is traded in US dollars there
is a strong correlation between the oil price and the dollar, and that
remains intact today.
Moreover, the International Energy Agency (IEA) recently cut its
demand growth outlook for 2014 in half, from 1.2 million barrels to
600,000 barrels. This is due to the slower pace of economic recovery in
Europe and a slower pace of growth in China, Latin America and across
the Middle East economies. The IEA has only cut its 2015 demand growth
forecast by 200,000 barrels to 1.2 million. The risk is that this
forecast is also too high rather than too low, Weafer said.
Furthermore, US oil production growth is increasing faster than had
been forecast at the start of the year. “Even though the US is still the
biggest importer of oil in the world, it requires less imported crude
and is slowly increasing exports of distilled products,” Weafer said.
And there is more oil to come. The international action against IS in
Syria and Iraq has reduced the threat of a major disruption of oil flow
from Iraq. Libya has restored exports to approximately 500,000 barrels
per day and, despite the continuing civil war, the flow has held steady
for longer than previous efforts to restore exports.
But Weafer warned that
risks to the upside remain.There
are still some threats which could provide price support for
Urals/Brent above $90 per barrel or send the price back towards $100 per
barrel.
One of the risks is that IS could blow up a major pipeline taking
Iraqi oil to export markets or attack some production facilities. “That
seems unlikely, albeit not impossible, as these installations are now
very heavily guarded,” Weafer said.
Moreover, escalation of fighting in Libya which would cut oil flows again.
Terrorism in Nigeria, i.e. as the Boko Haram group makes gains and may soon start to target sensitive oil facilities.
Another factor that could boost oil prices is a strong pickup in
China’s economy or in other major oil import economies, Weafer said,
adding that is unlikely over the medium term.
Finally, OPEC ministers could agree to cut production to better balance the market.
The sustained drop in oil prices has focused attention on OPEC and
specifically what Saudi Arabia will do, or not do, to halt the decline
in the oil price.
Saudi Arabia’s Oil Minister Alial-Naimihas consistently said that
Riyadh views $100 per barrel Brent as the right price for both producers
and consumers. In the past, the Kingdom has added more oil to prevent
the price rising to $120 per barrel and cut production to prevent a slip
below $90 per barrel.
“The oil optimists believe that Saudi Arabia will do the same again this time, while the pessimists think not,” Weafer said.
Iran is leading the demand that Saudi Arabia and the Gulf producers
cut production in order to support the price, Weafer said. Tehran argues
that sanctions have artificially cut its market share and it needs a
$130 per barrel average to support its flagging economy.
However, Weafer reminded that Saudi Arabia is Sunni and Iran is Shia,
and “it is fair to say that there is no love lost between the two
nations. The Saudi’s will not do Iran any favors. Besides, if the oil
price rallies that would likely hasten the removal of sanctions and the
return of Western oil majors to Iran. Iran has huge reserves and, medium
to longer term, would cut into Saudi Arabia’s market share”.
The Macro Advisory senior partner said that Saudi Arabia, the United
Arab Emirates and Kuwait, the so-called swing producers, have built up
substantial reserves over the past few years as oil averaged close to
$110 per barrel. Even though their budgets now need a much higher
average to balance, as the case pre-2008, they could allow a year or so
of lower oil in order to help the global economic recovery and also to
keep Iran and Libya suppressed, Weafer said.
“However, the Arab producers are in a less favorable position to
Russia, because their currencies are pegged to the US dollar. It means
that they do not have the flexibility to allow their respective
currencies to weaken – as Russia has done – in order to protect oil
revenues or to boost domestic industries,” Weafer said, adding that the
UAE, for example, relies heavily on tourism as one of its main
diversifications from oil. As the dollar rises it drags the dirham along
with it and the cost of vacations in Dubai and other emirates becomes
less appealing. Therefore, any action to keep the oil price low will
have a limited shelf life, Weafer said.
“The Russian Central Bank learnt the lesson of not trying to protect
the ruble against a falling oil price in 2008-09 when it burnt through
$200 billion (one-third of financial reserves) in an effort to support
the ruble. That was a waste of money and it will not do the same again.
Instead the Central Bank let the ruble weaken as oil falls in order to
protect budget revenues and the ruble spending power of accumulated
savings, which are all held in foreign currencies,” Weafer said.
Russia’s economy is much better protected against the falling oil
price than is the case with most OPEC producers specifically because of
the flexible ruble exchange rate. For the first eight months of this
year Russia's budget ran a surplus equal to 2% of GDP, or almost $26
billion, despite the weakening price of oil, Weafer said.
Saudi Arabia and the UAE have significantly increased spending on
defense and social programmes since the Arab Spring. Budgets that used
to comfortably balance at $50 or $60 per barrel now require close to $90
per barrel at current production volumes. A cut in production volumes
will only push the breakeven price higher, Weafer said.
http://www.neurope.eu/article/all-eyes-opec-brent-crude-keeps-falling