Market Overview: Saudis welcome the return of “calm” to oil markets

By Eithne Treanor

There was a sense of optimism in parts of the market at the end of this week as oil prices began to look stronger and supply appeared to ease. The Saudi Arabian oil minister described the market as “calm” after months of volatility that had traders and investors on edge. In early trading on Friday, Brent crude was priced above US$61 with WTI holding steady below US$50 a barrel.

Saudi Arabia’s oil minister, Ali al Naimi said he believed oil demand was on the way up again and was grateful to see a sense of calmness return to the market. The veteran oil minister led the charge against overproduction when the OPEC ministers took a firm stand at their last meeting in November.

Many analysts thought it was a huge gamble on OPEC’s part, with several questioning the relevance of the organisation, as prices fell so quickly.

The OPEC ministers never said it would be a pain free action, but they were prepared to wait it out until the market rebounded and that appears to be happening this month. Al Naimi also said that Saudi Arabia would hold its market share and soon regain its position as the world’s largest oil exporter.

He added that Saudi Arabia plans to become the world’s second-largest exporter of refined oil products by 2017 as the economy diversifies.

Some American oil producers have certainly suffered in recent months with announcements of cutbacks in investments and personnel. The rig count continues to decline, though somewhat slower, in the US and according to the weekly figure from Baker Hughes, American rigs fell by 37 to 1,019 last week.

We’re waiting for this week’s figures but the number is more than 400 lower than this time last year and currently at it’s lowest in four years.

According to JBC Energy in Vienna, “a fall in rig count does not translate immediately to a drop in oil output,” as one must take into consideration the time lag, but expectations of stronger demand in the second quarter are being talked about in the market with greater confidence.

Standard Chartered agrees that “oil prices will begin to rebound sustainably” and the investment bank is forecasting that Brent will see an average of US$85 a barrel in 2015. The bank’s head of global research Marios Maratheftis, based in Dubai, said that American month-on-month oil production growth would begin to decline because of the lower rig count.

According to the EIA, American oil fields pumped 9.29 million barrels a day in the week ending February 20, the highest in three decades.

Oil stocks are still the worst performing on the stock market this week. Exxon Mobil announced that it would run a smaller capital expenditure program over the next few years. That news surprised the market after the company has maintained in recent months that lower oil prices would have very little impact on its investment plans.

In a filing with the US Securities Exchange Commission, the company says it anticipates investing an average US$34 billion annually “for the next few years.” That’s a decrease of 12 per cent from 2014 spending levels and about 8 per cent lower than previously planned for the 2015-17 period.

The Spanish oil company Repsol also announced it will reduce its upstream spending by 35 percent this year, with more than half to come from lower well exploration, despite a strong performance from its refining business.

News of growth in demand and a steadier oil price may reassure the OPEC President, Nigeria’s oil minister, Diezani Alison-Madueke, who said she might convene an emergency meeting if the prices stay low.

Its highly unlikely she would get the support of Saudi Arabia, the United Arab Emirates, Qatar and Kuwait, but smaller producers could rally around her.

“This has revived speculation about divisions within the group and its so far placid response to the slide in oil prices,” says Tom Pugh, Commodities Economist at Capital Economics in London. He adds that “Venezuela and Iran have been very vocal in their attempts to convince other members to cut output,” but Pugh says that in the unlikely situation that an emergency meeting is called, “policy is unlikely to change.”

American oil inventories continue to rise and reach new levels, according to the weekly US petroleum report from the EIA. Last week saw an increase of more than 8 million barrels to 434 million barrels, almost up 10 per cent on last year. American refineries are currently processing less crude and many are undergoing maintenance. The report also showed that US oil imports and current domestic oil production has remained steady.

Most economies around the world have benefited in recent months because of a lower oil price. Standard Chartered’s Maratheftis said that lower oil prices have helped economic growth in countries like the US and India. American growth is expected to be just above 3 per cent this year, the highest since 2005, according to estimates compiled by Bloomberg. India’s economy is said to expand 5.5 percent.

Data from Japan this week showed industrial production up 4 percent in January and China’s official Manufacturing PMI numbers are expected higher over the weekend. China and Japan are two of the largest oil consumers in Asia but both have suffered slow economic growth that has impacted oil demand growth in recent years.

The Saudi Arabian oil minister, Al Naimi may be in more optimistic form this week and he also reminded us of data that’s proving that the lower oil price is driving up demand in China and the United States. Analysts believe that any increase in demand could eventually lead to price stability and hopefully to a price rebound.

With signs of energy demand growth creeping back to the market, we could see the price stabilise or rise in the coming weeks. The IEA reported that Asia would account for two-thirds of the growth in global oil demand this year. Already Asian daily consumption is above 31 million barrels a day, just slightly above that of American oil consumption.
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