Syed Rashid Husain
IS the oil market recovery coming to a halt? Unexpected outages - from Nigeria to Canada and Kuwait to Venezuela - have helped oil markets. The bigger the outage, the steeper has been the rise. Although it recovered a bit on Friday, yet oil prices had hit a one-month low on Thursday.
Concerns are thus reemerging. “We view the price recovery as fragile,” US investment bank Goldman Sachs said in a note last week. Barring a major supply outage, oil prices will remain below $50 a barrel over the summer, the bank noted.
A month's worth of wildfires in Canada's oil-producing province of Alberta and continued rebel attacks on Nigeria's oil infrastructure had taken off some 3.5 million barrels per day of capacity in May alone, Goldman's data said. Weather issues and dwindling funds have also knocked Venezuelan oil production by about 85,000 bpd year-to-date through to the end of May, it added.
However, the restart of Canadian production, prospects of a solution to Nigerian outages, the larger-than-expected output from OPEC members, and the risk of smaller-than-expected production declines as a result of higher crude prices are likely to temper price gains going forward, the report argued.
Output is also proving resilient outside of OPEC, with Brazil's state-owned oil giant Petrobras seeing a 6 percent jump in output from April, and loadings from North Sea platforms are expected to skim two-year highs in July.
Struggling markets aren’t out of the woods, insists Paul Jackson of Source. Looking at the performance of West Texas Intermediate crude oil since 1870, he predicts that prices will tank to $20 a barrel, or about 60% from its current levels, and languish there for a while, before recovering.
“What you find is that in four out of every five months since 1870 the price has been between $20 and $60, when you measure in today’s prices,” he was quoted as saying at the sidelines of the Inside ETFs Europe conference in Amsterdam. “Every three or four decades, oil goes above that range. And occasionally you get a bubble like we had in the last 10 years.”
“Those high prices sow the seeds of their own destruction. Supply goes up, demand comes down. So prices come back down, but when the price comes down, it doesn’t stop at $60, it doesn’t stop at $40, it always goes down to $20,” he added.
He explained that the marginal cost of production is still so low that oil producers haven’t started to materially cut supply. According to the Oil & Gas UK, the UK’s offshore oil-and-gas industry association, the marginal costs were expected to fall to $17 a barrel for the country’s producers this year, down from around $21 in 2015.
“So even with oil at $30 a barrel, it’s not below the marginal cost of production in the UK, and the UK isn't the cheapest place in the world to produce oil,” MarketWatch quoted Jackson as saying.
The state of Asian economies is also adding to the gloom. While many pinged hopes on India, data seems contradicting the Indian growth narrative. Official Indian growth figures may have been overstated by as much as 4.8 percent, some are saying.
SA Aiyar, formerly a consultant to the World Bank and Asian Development Bank, and currently the consulting editor of The Economic Times, has expressed concerns over the "inconsistencies" in data. He points to the discrepancy between growth numbers in manufacturing from the National Accounts, which said it was at a growth rate of 9.3 percent in 2015, whereas the Index of Industrial Production (IIP) had growth at close to zero.
One caveat there is the IIP only includes the bigger industries in its data, excluding the faster-growing smaller industries. Even so, Aiyar says the differential appears to be too large to explain it away. Also defying acceptance is the 7.9 GDP growth in the first quarter when considering exports have dropped for 17 straight months. He compared with other Asian economies during times they were growing at a hefty pace, led by export growth in the double-digits.
The report from China is not very encouraging either. Chinese exports dropped by 4.1 percent in May against the same period last year whereas, its investment in fixed assets plummeted to the lowest level in 15 years.
So far China's decision to buy up a lot of oil in order to add to its stockpiles, as well as its independent refineries (teapots), has masked the slowdown in economic growth in the region. Again Capital Partner John Kilduff says that Chinese crude demand will "fall off a cliff" in the next month or so because the country has nearly filled its strategic reserves. Matt Smith, director of commodity research at ClipperData, told "Squawk Box" he expected oil prices to fall back toward $40 a barrel as Chinese strategic reserves reach capacity.
China put about 787,000 barrels of oil per day into storage in the first quarter, Oilprice.com reported, citing Bloomberg data. By Smith's count, China has already stockpiled about 135 million barrels of oil. China's storage capacity is believed to be around 155 million barrels. In theory, China could hit capacity in 20 to 30 days.
The Japanese economy seems struggling too. The World Bank recently revised its outlook for Japanese GDP growth to 0.5%, 0.5% and 0.7% for 2016, 2017 and 2018. Those numbers are almost 50 percent lower than prior estimates.
South Korea also appears slowing down. In the first quarter, its GDP grew by only 0.5 percent. That's the lowest pace in over a year. Consequently, Bank of Korea cut its key interest rate to a record low of 1.25 percent for June.
And all this means that oil demand growth may slow down in Asia too over the next 18 months.
Meanwhile, Saudi Arabia, Iran, and Iraq are ramping up production, and higher prices appear to be eliciting a supply response from US drillers too. Those factors could send crude prices spiraling down toward $40 a barrel, and perhaps even into the $30s, Smith said.
Not everyone agrees. The elements for a recovery in prices are in place in the oil industry, says McKinsey. “One way or another, the factors that sent oil prices way down are changing," said Scott Nyquist of McKinsey in Houston. “Deepwater projects are prominent among cancelled new capital projects and US production has begun to decline, as low prices have taken some of the highest-cost assets out of production," he said, adding that “high costs and ageing assets are also affecting fields in Colombia, Mexico, Nigeria, the North Sea and Russia – all are hurting, and declines in production in these markets are adding up."
Oil prices will surge above $85 a barrel by the end of the year, Michael Rothman of Cornerstone Analytics, told the CNBC.
Harold Hamm, chairman and CEO of Continental Resources, believed the oil market is at a turning point, rising to a lofty $69 to $72 per barrel by the end of the year.
Crude world seem bumping into interesting times - once again!
