By Eithne Treanor
The low oil price environment seems to be settling in for longer than the market anticipated as OPEC and non-OPEC producers continue to deliver oil to an over supplied market. Strength in the dollar also impacted the price slide this week and in early trading on Friday, Brent crude was priced below US$54 with WTI struggling around US$43 a barrel.
Kuwait’s oil minister, Ali al-Omair said that OPEC had no choice but to keep its production steady despite the excess supply. He made it clear that the organisation was not willing to lose market share at a time when non-OPEC players were also flooding the market.
He said that non-OPEC players needed to “cooperate” and reduce production, re-iterating many of the ministers sentiments that OPEC did not create the over supply on the market and they were not going to act to reduce it. He acknowledged that the lower price environment was creating a strain on the budgets of oil producing countries.
The possibility of additional oil on the market may become a reality in the next year if talks between Iran and the international community continue with positive results. Restrictions on Iran’s oil exports could be eased or lifted if the Islamic Republic agrees to strict limits on its nuclear program.
American and European officials continue their talks with the Iranians on a shift in policy. Foreign ministers from the UK, France and Germany are due to meet Iranian nuclear negotiators in Lausanne on Saturday. While any resolution would be welcomed on a geopolitical level, the impact on the oil price could be detrimental.
According to Bank of America Merrill Lynch, the hope of a faster “V-shaped recovery in oil prices is unlikely.” Looking back in history, the bank says, that rising commodity prices have dominated the global economy for the past 15 years in combination with a zero interest rate policy, and a weak dollar. “This cycle has now gone into reverse with a decelerating industrial economy in China and the rise of US shale.”
The bank fears that “this combination of a stronger dollar, a slowing China, and falling commodity prices is not going away anytime soon” and it cautions sustained slower demand. The bank put its average price for Brent in 2015 at US$52 and in 2016 at US$58 a barrel.
American stockpiles continue to rise and surprised the markets by adding 9.6 million barrels last week to total 458 million barrels. That’s the highest in 80 years according to the US Energy Information Administration. Shale output is showing few signs of slowing down despite financial cutbacks and the fall in the number of rigs currently operational.
A report from Capital Economics is more optimistic that BoA Merrill Lynch and says that this situation cannot last. Julian Jessop, Head of Commodities Research says, “new lows for US oil price unlikely to be sustained” and he sees Brent becoming the better international benchmark.
He fears the WTI price could fall sharper in the short term, but adds, “the slump in the number of active drilling rigs is already being reflected in slower growth in US production and outright declines should follow soon.” A period of even lower prices in the short term should also help energy demand recover more quickly. He puts an average price for Brent at around US$60 a barrel for 2015.
With no fast global economic recovery expected, the market will welcome any news of positive activity. The US economy is still showing slow strength in the labour market and the jobless rate fell to 5.5 per cent in January. Consumer sentiment hit a new record high above 103 in January and 96.4 in February but US retail sales unexpectedly fell in February and industrial production and manufacturing orders dropped.
The big fear in the US now will be that any interest rate hike from the Federal Reserve will impact this delicate growth pattern. The Fed downgraded its economic growth and inflation projections, a signal the market took positively as no rush to bring borrowing costs back to more normal levels.
An OECD forecast says that China’s economy is likely to grow around 7 per cent this year and slightly less at 6.9 per cent in 2016, as the government pushes reforms on interest rates and currency, and maintains its policy of slower but higher-quality growth.
The Bank of England could consider cutting interest rates if inflation threatens to fall further. Euro-zone economies continue to improve slowly with GDP in the fourth quarter of 2014 at 0.3 per cent after a 0.2 percent quarterly growth in the third quarter and 0.1 percent in the second quarter of the year.
White the major international oil companies are taking a hit on share price and dragging valuation on the stock markets with them, one of the world’s biggest trading companies has a different perspective. Vitol saw a sharp recovery in profits in 2014, reaching US$1.35 billion in after-tax net profits. Extreme volatility in the fourth quarter certainly helped when the oil price began its decline.
Even if a deal is reached with Iran, there’s little chance of additional barrels in the near future. This will hopefully give the market time to recover when demand is expected to pick up in the second quarter.