Oil prices may very well remain low for another year

25 august 2015 | Rossiyskaya Gazeta

The price per barrel has hit a historic minimum since March 2009 and dragged the ruble down along with it. So what is going to happen next if the ruble depends on oil so much? ‘All indications are the Brent will soon be trading at USD 40 per barrel. It’s the next hurdle the oil price is now up against on its way down,’ the Head of the Department for Strategic Studies in Energy of the Analytical Center Alexander Kurdin told a Rossiyskaya Gazeta correspondent in an interview. ‘It’s the level of the average variable costs for a number of major oil extraction projects in the US, Canada and on the shelf. If the price goes any lower than 40 dollars a barrel, it will be cheaper to stop extraction there.’

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

When the price of oil falls to 45 dollars a barrel, the global oil market contracts by 0.4 million barrels a day and at 40 dollars a barrel, the market volume goes down by 1.5 million barrels a day, analysts estimate. That is the estimated amount by which supply currently exceeds demand.

‘There are several factors that keep market from rebalancing at the moment,’ Mr. Kurdin believes. ‘First there is a lot of concern about the current locomotive of the global demand for oil, China. Even though stock market fluctuations in China do not play as significant a role as they do elsewhere, the macroeconomic statistics for July turned out to be pretty bad.’

Secondly, shale oil production is demonstrating outstanding resilience, the expert notes. Drilling is still on the rise in the US. What means is that even as oil prices keep falling, American shale oil companies keep expanding production, including production of hard to recover oil. Nevertheless, the Analytical Center estimates that in the near future the amount drilling around the world should start to go down.

Thirdly, the Organization of Petroleum Exporting Countries has been behaving rather erratically lately, even though they are interested in higher prices, Mr. Kurdin says.  Two members of the cartel, Saudi Arabia and Iraq, were producing record amounts of oil in July, according to available data.

‘The result is that OPEC oil production now exceeds the quota of 30 million barrels a day they set themselves by 1.5 million barrels,’ the expert says, ‘So that’s the 1.5 million (out of total global production of 96 million) that are ruining the market for all net exporters of oil.’

What all of this means is that longer time is being taken by the oil market to settle into a new supply and demand equilibrium than we had expected in the first six months of the year. ‘Our estimates suggest that dumping the oil stocks that have accumulated around the world is going to take until the end of this year and a significant portion of next year.  But until that new equilibrium is reached oil prices won’t return to the acceptable range of around 60 dollars a barrel.  And naturally, the situation may very well be made more complicated by the return of Iran to the global market as a full-fledged player late this year or early in 2016. In other words, oil prices may very well remain low (at 40-50 dollars a barrel) for another year,’ Mr. Kurdin makes a disappointing forecast.

Source: Rossiyskaya Gazeta