…Experts predict further drop
Since 2014, oil prices at the international market have consistently slumped. In fact, it has crashed severally setting records after records.
Monday this week, oil price slumped to its lowest level in almost 12 years forcing many traders to forecast that it would continue to tumble. Some have boldly predicted that oil would sell between $15-$20 in coming months.
Brent gave up gains made at the end of last week, when it recovered to a little above $34 a barrel at one point, after more evidence emerged of waning demand in China, one of the biggest oil consumers in the world. The price dipped as far as $32.50 a barrel, around 40 cents above the near 12-year low of last week.
Two days later on Wednesday, oil price again sharply plummeted at the international market as low as $30 even as the latest range of investment bank forecasts predicted that the price will drop as low as $10 a barrel before finally bouncing back.
Consequently, Chinese markets crashed more than five percent overnight which triggered a 46th consecutive month of deflation in ‘factory-gate’ prices for goods. This is suggestive of weak demand that would signal slowing growth and weaker oil consumption, adding to fears resulting from depreciation in the renminbi, which makes dollar-denominated oil and its derivative products more expensive.
Reuters cites data showing that purchases of oil had already begun to fall in China last November, the last month for which data is available. In a note late last week, Barclays said implied oil demand had fallen 4.7 percent month-on-month in November, or two percent compared to the same month in 2014. The bank expects further decline this year.
Slowing demand adds to concern over a global supply glut at a time when output is exceeding purchases by around one to two million barrels a day, hitting prices as a result. This was before the increase in Iranian production expected in the near future and in the wake of a diplomatic schism between Iran and Saudi Arabia that has knocked hopes of a deal to limit exports.
As a result of all of this, speculators are convinced that the price is only likely to head down. Amid predictions that prices could fall to $25, $20 or even lower, institutional investors have increased their net short position–bets that prices will fall–to an all-time high.
Some bullish analysts, however, suggested that oil price may, in fact, have stabilised and that improvements in the US economy will prevent further sharp falls. “The strong job data from the US, last week, should help keep the prices from bleeding further,” Daniel Ang, a Phillip Futures energy analyst, told Wall Street Journal.
Oil price has recovered somewhat after its latest crash, with international benchmark, Brent crude, rising close to six percent from its latest trough to above $34 a barrel.
A rally began after oil slumped to a near 12-year low of just above $32 a barrel on Wednesday, in the wake of the latest figures pointing to resilient US production, even as a supply glut dragged prices to unprofitable levels. It was given added impetus overnight in Asia, as equity investors in the key China market recovered their poise after a week of turmoil.
But analysts were quick to caution against reading too much into the increase. “The rebound is just technical correction; there are hardly any positive news in sight,” one Singapore-based trader told Wall Street Journal.
They were right going by subsequent drop on Wednesday when it slumped from $34 to $31 and further generated anxiety among the ranks of OPEC members, who reacted by calling for a crucial meeting where profound decisions are likely to be taken concerning reduction in production quota.
The latest price drop was caused by the escalation of tensions between Saudi Arabia and Iran in the wake of the execution of senior Shia Muslim cleric, Nimr al-Nimr. While this briefly drove prices higher, the prevailing view that it would prevent the powerful OPEC cartel, of which both countries are members, from agreeing on production cuts to support higher prices. In fact, most experts think it is likely to make the situation much worse.
Nigeria in particular responded by leading the call for a meeting where necessary technical and political issues would be discussed, perhaps to persuade the ‘warring’ nations to call a truce and ensure that production cuts are arranged and agreed upon and thus facilitate a favourable price regime mechanism in coming months for the mutual benefits of both producing and consuming nations.
Interestingly, according to The Times report, Iran is about to emerge from years of international sanctions and is ready to bring 500,000 additional barrels of oil per day to a market already oversupplied to the tune of two million barrels. The country already has “customers lined up”, especially in Europe, Dr Fereidun Fesharaki, a former oil adviser to the Iranian Prime Minister and now chairman of consultancy FGE, told The Times.
This is triggering a price war that is adding further weight to prices. Reports have emerged that Saudi Arabia is slashing prices for its crude in Europe to try and prevent its customers buying from Iran as the market becomes another forum for what has been dubbed an ‘economic war’ between the two countries.
Oil prices could fall as low as $25 a barrel when Iranian oil exports surge in the coming months, said Fesharaki, while others have predicted that it could go as low as $20 or even below.
The Saudi Angle
Last Sunday, Saudi authorities severed all diplomatic ties with Iran and told all Iranian diplomats to leave within 48 hours. Of course, there are huge implications for this action, one that has spiralling effect.
The decision came after Iranian protesters attacked the Saudi embassy in Tehran, ransacking and setting fire to the building in retaliation for Saudi Arabia’s execution of a prominent Shiite cleric and 46 others the day before.
Understandably, this opened a new fiery chapter in the usually delicate or better still frosty relationship with Iran, and as always with devastating spill over consequences for the rest of the world that depends on energy from oil. The crisis could just be the beginning in the series, according to informed commentators.
“2016 could prove to be the year of living dangerously for Saudi Arabia with the Kingdom facing substantial economic and security headwinds,” argued RBC Capital Markets’ Global Head of Commodity Strategy, Helima Croft, in a note to clients.
Saudis’ Ministry of Finance recently unveiled the 2016 budget, which promised “sweeping reforms” that will ostensibly patch up its fiscal problems. The government also hiked petrol prices by nearly 50 percent right after the budget was released, which is a “sign that the leadership is committed to carrying out these changes,” Croft wrote.
At first, this all sounds pretty good given that Saudi finances have been crippled over the last year by lower oil prices and the Kingdom’s involvement in regional conflicts.
However, “the proposed austerity measures could still prompt a public backlash as they imperil the social contract between the monarchy and Saudi citizenry, which has helped to underpin stability in the Kingdom for decades.”
Notably, people already seem somewhat vexed by the belt-tightening. As Croft pointed out, some Saudi commentators denounced the petrol price increase on Twitter, and there were long lines at gas stations ahead of the hike.
But the Saudis are not the only oil producing nation living dangerously as it were on the precipice. Nigeria has been and continues as its oil revenue dwindles with the resultant massive impact on funds accruable to the federal government.
President Muhammadu Buhari painted a very unpleasant picture of the revenue profile when he announced that the 2016 budget would be funded partly from N1.84 trillion internal and external loans or about one third of the total budget.
Further, the Nigerian government is yet to pay some of its workers November and December 2015 salaries as is the case with several private organisations which are at the receiving end of the harsh cash-crunch regime.
OPEC emergency meeting
Like the common saying, ”who feels it knows it”, the Organisation of Petroleum Exporting Countries, OPEC, who have been at the receiving end of the biting and persistent drop in the price of oil at the international market and have equally suffered greatly at the domestic level because of fall in their respective revenue profiles, have thought of the situation and wants immediate succor.
Tuesday this week, the Nigerian government initiated moves for member countries to come together for an emergency meeting to address collapsing prices that has ravaged revenues.
The reasons were obvious; Monday’s drop had tremendous effect and perhaps in anticipation of the subsequent fall the following day-Wednesday, Nigeria’s Minister of State for Petroleum, Dr Ibe Kachukwu, declared that he expects an extraordinary meeting of the oil cartel in “early March” to discuss nosediving crude prices.
“We did say that if it (the price) hits $35 dollar per barrel, we will begin to look (at)… an extraordinary meeting,” said Kachikwu, whose term as OPEC president finished in December.
The minister, who doubles as the Group Managing Director of the Nigerian National Petroleum Corporation, NNPC, the agency that controls oil operations in the country, said at the earliest, he expects an extraordinary OPEC meeting ‘early March’ to discuss nosediving crude prices.
That Monday, New York’s benchmark, West Texas Intermediate, WTI, for February delivery tanked to $30.41 a barrel, which was the lowest level since December 3, 2003. Europe’s Brent North Sea crude for February dived to $30.43, a point last seen on April 6, 2004.
Kachukwu reacted at an energy forum in Abu Dhabi, stating that the prices have hit levels that necessitated a meeting, but added that he was yet to confirm with fellow OPEC ministers if they would be willing to attend.
“The prospect of a meeting is definitely capping losses for the day and driving prices back towards $32, however I cannot see it stopping the slide in the longer term. The call for the meeting is not necessarily a surprise as we have lost almost 20 percent since the start of the year and are looking to test $20 a barrel,” said analyst, James Hughes at trading firm GKFX.
In midday deals on Tuesday, Brent prices rebounded by 25 cents to $31.82, while WTI stood at $31.30, down 11 cents from Monday’s close.
Saudi-led Gulf exporters within OPEC have so far refused to cut production to curb sliding prices, seeking to protect their market share despite a heavy blow to revenues.
Kachikwu said member states differ on the issue of intervention.
“One group feels there is a need to intervene. The other group feels even if we do so, we are only 30 to 35 percent of the producers really”, as 65 percent of supply comes from non-OPEC countries, he said at the Gulf Intelligence UAE Energy Forum.
Nigeria, Africa’s largest economy and foremost oil producer, has been ravaged by collapsing oil prices in recent years because crude accounts for 90 percent of the nation’s export earnings and 70 percent of overall government revenue.
“The reported breakeven price for Nigeria is around $87 a barrel and with price looking so much weaker it is no surprise if they are one of the countries asking for a meeting before the next scheduled one in June,” added Hughes, noting rumours that other OPEC members also want an exceptional gathering.
OPEC refused to slash output at its scheduled production meetings in June and December last year, despite a collapse in prices since July 2014, when the market stood above $100 per barrel.
– OPEC’s ‘big gamble’
The Saudi-backed policy and supported by only OPEC gulf members, is aimed at pushing oil prices lower to squeeze US shale producers out of the market. However, it has slammed smaller producing nations like Nigeria and Venezuela.
“OPEC has taken a big gamble that hasn’t really worked so far,” said analyst, Fawad Razaqzada, at Gain Capital.
“Essentially, smaller OPEC members, who are struggling really badly, are unlikely to persuade the Saudis to make a U-turn on its policy of maintaining market share.”
The market’s dramatic collapse has continued in 2016, as a row between cartel kingpin, Saudi Arabia and fellow cartel member, Iran dimmed prospects for production cutbacks.
Crude futures plummeted 10 percent last week, also on fears about the global supply glut and demand weakness in China, the world’s biggest energy user.
The rise in the greenback, which makes dollar-priced oil more expensive for holders of weaker currencies, has dented prices as well.
Additional reports from Reuters,