Situation on the global market: oil glut and protection of existing contracts

20 january 2016 | INA Rossiya Segodnya

'At the moment all exporters are willing to sell oil cheap, but the main consideration is to hold on to your contract,' said Leonid Grigoriev, the Chief Advisor to the Head of the Analytical Center , speaking at the press center of INA Rossiya Segodnya at the Roundtable ‘Global Economic Trends: the Chinese Factor and Oil Prices.’ What is in store for Russia?

Leonid Grigoryev
Leonid Grigoryev
Chief Adviser to Head of the Analytical Center

'China is slowing down and trying to shift to a new model, their slowdown is gradual and is going to take many years,' Mr. Grigoriev said. 'Currently, China is facing its own difficulties: it is trying to close the gap between the Shanghai and the Hong-Kong stock exchanges and I am sure they will eventually handle these difficulties.'

The expert believes the current glut of oil is a result of three factors: Iran’s return to the market as an exporter, the slowdown in the Chinese economy and the fracking boom in North America. The Americans, primarily through fracking projects, have managed to bring their oil output to 2.5 million barrels per day.  As fracking companies ‘go bankrupt’ there, they leave behind their derricks that get snapped up by the next owner at a fire sale price and are bound to be put back into operation as soon as market conditions are more favorable. The US currently has strategic reserves and if it should choose to, it can put pressure on the market, the expert says.

Global oil consumption, including in China, is currently growing at a pace of within 1 million barrels per day or about 1% per year. The current glut is not that great but it is more than enough for the oil market. At the New York Stock Exchange, the shares of foreign and energy companies, including oil and gas companies, took a dive, while the shares of American companies have not been affected.

Oil producing countries are currently holding fast on to their contracts, trying to defend them, their budgets and investments in the industry are taking a hit, but, say, Saudi Arabia is going to weather this storm out as it hass got plenty of reserves. At the moment, despite the falling prices, the Saudis have actually stepped up production because they want to defend their markets against Iran, Mr. Grigoriev believes.  In the meantime, Iran will be bringing 0.5-1 million barrels to the market and it is going to have a hard time breaking into new contracts as all oil exporters are currently willing to sell cheap to ensure they can keep selling the same amounts under their existing contracts.

In general, Mr. Grigoriev is convinced that USD 110 per barrel was a kind of a political premium and that the fair price of oil is about USD 70 per barrel.

A video of the event - INA Rossiya Segodnya