Next week the Head of the Russian Ministry of Energy Alexander Novak and the Secretary General of the Organization of the Petroleum Exporting Countries (OPEC) Abdalla El-Badri will discuss the situation in the oil market.
Oil price will depend on Iran’s relations with other OPEC nations
The Head of the Analytical Center’s Department for Strategic Studies in Energy, Alexander Kurdin, gave an interview to a correspondent of the Rossiyskaya Gazeta newspaper in which he talked about the problems and hopes of oil exporting nations.
- Mr. Kurdin, so does this mean that now the price of oil is going to depend on Iran?
Alexander Kurdin: Well, not on Iran as such but on Iran’s relations with the other OPEC nations. Q2 figures indicate that the OPEC has been increasing production and at a fairly fast pace, primarily in Saudi Arabia and Iraq. They are currently producing more than a million barrels above the OPEC quota of 30 million barrels a day. For the moment we are just hoping it’s a temporary imbalance. Lack of discipline will become an especially serious problem for the OPEC late this year / early next year when the process of lifting sanctions from sales of Iranian oil has been completed.
- So how much oil will Iran be able to offer in the market then?
Alexander Kurdin: About a million barrels a day on top of what’s on offer now. Maybe a little more and so far we don’t know how the OPEC is going to adapt. Maybe they will increase their quota or reallocate national quotas within the organization.
- And what about US shale oil, is that still a factor driving down the prices?
Alexander Kurdin: Of course. If you want to get a feel for what is going on with the companies involved in the relatively high cost shale oil extraction, you should look at the changes in the number of drilling rigs they are operating. Late last year, at the peak of shale oil production, there were about 1,500 rigs in operation but by June this number fell to about 600 rigs. Over the past weeks we’ve seen several dozen more rigs go online. It’s not a lot but this is a clear indicator that at 60 dollars per barrel, just as analysts have been predicting, American shale oil producers break even and can even turn a profit.
- In other words, we are seeing a new growth cycle of shale oil production?
Alexander Kurdin: Well, maybe, or in any case, stabilization.
- OK, it looks like we have covered the supply side of the oil market, let’s talk about demand parameters now. What are the key variables here?
Alexander Kurdin: First of all we are seeing very good growth in developed countries at the moment, even though last year they were largely to blame for the slowdown in oil demand. This was true about both America and Europe. Japan even experienced a slightly negative GDP growth. The thing is that demand for oil has usually been stable in developed countries over the recent years, but last year it dropped by almost five hundred million barrels a day and that had a huge impact on the global oil market. This year, the IMF expects growth in the developed countries by a little more than 2 per cent and next year even a faster growth is possible. Japan is pulling out of recession while in the US a very good growth is expected, roughly at the same level as last year, i.e. 2.5% and in the Eurozone a 1.5% growth is expected against the 1% seen last year.
- What about the Greek crisis, is this no longer a factor for the European economy and therefore for oil demand in Europe?
Alexander Kurdin: What is happening in Greece can slow down the European economy perhaps by a few tenths of a per cent. It does not sound like much but if we are talking about the difference between 0.8% and 1.5%, that’s actually quite a big difference.
- So an eye still has to be kept on Greece?
Alexander Kurdin: Of course as it is still a factor contributing to instability. However, this year an increase in oil consumption by almost half a million barrels a day is expected in the developed countries. Thanks to this on the global scale we are expecting an increase of not just 0.7 million barrels a day as we saw at the height of the crisis last year but in excess of 1 million barrels a day and that’s a significant difference.
- And what about the developing nations? The collapse on China’s securities market has really frightened everyone.
Alexander Kurdin: Well, first of all, it is obvious that several days ago the stock exchanges in China hit bottom and now an upward correction is underway there. The markets have returned to a more or less stable state, at least, the stock exchange indexes are now significantly higher than they were at the start of the year. Secondly, the developments in the stock market do not necessarily reflect the situation in the economy. Latest macroeconomic statistics from China are very good. China’s industrial output growth, which is the indicator that’s directly related to demand for energy, grew by 7% in June, much more than had been expected in most consensus forecasts. However, fast economic growth in India and South East Asia may actually play a more important role this time around. These countries together are another oil demand driver apart from China. So at least for the time being we are expecting to see a pretty good growth in demand for oil.
- And when is equilibrium between supply and demand going to be reached?
Alexander Kurdin: Early next year or late this year the permanent oversupply of oil in the market will go away. Stocks will start to be slowly depleted and this will shore up the prices. But this will only happen on condition that the OPEC manages to agree terms for introducing new Iranian oil into the market and OPEC members maintain discipline.
- But another scenario is equally likely, isn’t it? The global market may just get an additional 2 million barrels a day, which could happen if the OPEC simply adhered to its own quota.
Alexander Kurdin: If the surplus oil from Iran simply hits the market without being adapted through OPEC restrictions, equilibrium will not be reached very soon. Demand will take longer to absorb the Iranian oil with the result that the imbalances in the market will continue for probably another year. Because at first the price will remain at 55 to 60 US dollars a barrel, which will be a limiting factor for oil production growth, mainly in the United States. However, demand will continue to grow, because like I said, the global economy is in a pretty good shape, especially, if we don’t have any new conflicts, sanctions and other problems that make people unnecessarily nervous.
- So what is the oil price that next year’s budget should assume?
Alexander Kurdin: You always want to err on the side of caution. I would not advise assuming a price higher than 60 dollars a barrel for the time being.
- And what would be the limit to the most optimistic expectations?
Alexander Kurdin: Not more than 70 dollars a barrel by the end of the year. If oil prices start growing, so will production in the US and the prices will be driven back down again.