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Eight
Reasons
Why Oil Won’t Remain
Below $80 per barrel! |
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Despite recent falls, commodities and
oil in particular remain
a safe haven for investment. |
When oil prices
plummeted to around $50 per barrel in January 2007, at a time when all and
sundry tuned bearish we gave eight reasons why lower prices were
unsustainable. While the past few years were characterized by tight refining
capacities we clearly now see sufficient refining capacity on-stream. Future
limitations are more likely to be found upstream. Now prices have once again
sunk this time to levels below $80 per barrel, which I believe will be a
short-term development. After a year of significant influence from the
financial market we expect again fundamentals to increasingly determine the
direction of the oil price in its search for a new equilibrium. Below are my
eight reasons why oil won’t remain below $80 per barrel.
1) Non-OECD
Demand. Demand
has remained stable in developing countries like China and India. In fact,
with oil’s fall there is less pressure on them to reduce subsidies. Taiwan and
Malaysia have recently lowered fuel prices recently and others are likely to
follow. This should insulate consumers from relatively high prices and
encourage refiners to boost refinery runs.
2) OECD Demand.
Consumption has
certainly deteriorated in OECD countries, especially in the US. However, this
has already been factored in to most models due to high prices of the past few
months. Some demand may have been destroyed due to the economic downturn in
the US, however a repeat of 2008 – when 1 million b/d of demand is being wiped
out – is very unlikely. Meanwhile, lower prices are expected t bring back some
of the lost demand.
3) Winter
Demand. In the
short-term, demand will be supported by consumption of heating fuels. Some
forecasting agencies are predicting severe weather conditions in 2008/09 in
the US Northeast (the world’s largest heating oil market).
4) Financial
Issues. Despite
recent falls, commodities and oil in particular remain a safe haven for
investment. If you have cash and want to invest in the long-term, oil similar
to gold still appears to be very attractive! Several oil companies’
price-earning-ratios are now also very appealing, when their reserves are
taken into consideration.
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While most GCC countries can live
with prices below $80 per barrel, Iranian, African and South American
members will suffer. |
The oil industry
supply chain has functioned under extreme price swings between $10 and $150
per barrel. However, a dysfunctional financial market may disrupt the supply
chain which could lead to supply shocks and higher prices.
The current problems in the financial markets will also mean that several
energy projects will become too expensive to finance.
5) Non-Opec
supply. Out put
from non-Opec countries remain limited. JBC Energy expects only 150,000 b/d of
additional supply to come on-stream in 2008, while 2009 supply growth is
likely to be around 500,000 b/d. Of most note, Russian supply has been very
disappointing. Any further delay or cancellation of upstream projects due to
lower process or credit issues can have a devastating impact on supply
availability in the midterm, resulting in even stronger downward revisions of
supply forecasts than experienced in recent years. Meanwhile, a price below
$80 per barrel from oil sands, GTL and CTL among others.
Supply will undoubtedly be
the driver of prices in the future!
6) Opec Policy.
Opec supply remain
abundant at present but nobody should doubt the organization’s ability to cut
production whenever needed. While most GCC countries can live with prices
below $80 per barrel, Iranian, African and South American members will suffer.
Opec is likely to defend a floor of $80-100 per barrel. The organization has
already decided to hold an Extraordinary Meeting on November 18, scheduled two
weeks after the US Presidential election, to discuss the matter. Qatar and
Iran, are already asking for production cuts.
7) Opec/Russian
Co-operation.
Russia’s relationship with the producer group took a new turn at the group’s
last meeting in Vienna, with Moscow sending its Vice Premier Igor Sechin and
its most senior delegation to the event. Future cooperation between the two is
likely, particularly given the stagnation in the Russian upstream sector.
8) Oil
Inventories. Oil
inventories have been forced lower around the globe, especially in the US.
Meanwhile, high oil prices and the credit crunch have made the cost of
restocking a big problem. A lack of stocks this winter could see some short
term supply shocks. Although we consider the refining system flexible enough
to handle bigger downstream challenges we believe financing difficulties and
upstream challenges will call the shots.
By: Johannes Benigni
Source: Benigni On Oil Markets |
