Global oil surplus will remain at the previous year's level

18 february 2016 | Izvestia

The position of “oil-dependent” economies, pricing factors, links between economy and diplomacy and, finally, oil demand and supply balance in 2016 – Alexander Kurdin, the Expert of the Analytical Center, speaks of these and other issues relating to prospects of the global energy resource market on Izvestia pages.

Alexander Kurdin
Alexander Kurdin
Department for Fuel and Energy Sector

Economies with high dependence on oil prices have to become a plaything of global market forces every few years and in this case authorities have nothing to do but to adapt to new realities. Opportunities to take control of the situation are few, but they exist. Let us leave aside conspiracy theories of pricing in the oil market due to their hopelessness: it would be difficult to do something with the world conspiracy.

Recognizing fundamental pricing factors leaves a space for action and it is within the diplomatic sphere now.

In recent weeks, signals for oil prices have come from stock markets rather than from diplomatic negotiations. Rumors regarding probable production cut, their disavowal and arising new rumors force the market to vibrate - this is the only thing achieved by the negotiators by now, but there are no other ways to support prices.

Fresh rumors arose on 16th February: Alexander Novak, the Russian Minister of Energy, - a key newsmaker in the global market now - met his colleagues from Venezuela, Qatar and Saudi Arabia to discuss joint actions. Results of the meeting turned out to be mixed, which was seen in quotations of oil futures. The day began with USD 34/bbl, the prices jumped by USD 1.5/bbl in anticipation of news about results of the negotiations, but then returned back quickly.

Frankly speaking, there was really nothing to encourage the market, despite a reached agreement on “freezing” the production. The parties recorded their status quo which was widely expected in any case. The production capacity of Qatar with respect to oil (unlike gas) is not too large. Venezuela is in a very complicated economic situation and is also hardly able to increase its production. Although Russia has been recently expanding its production, it has no significant opportunities for increasing supplies subject to worsening conjuncture and trends towards “tightening the screws” in the tax policy. The question was rather to persuade Saudi Arabia, which “opened all the taps” last year, to maintain a stable production. However, it was difficult to expect any other decision from the Kingdom in the existing environment.

A reduction of production by the Saudis at least by 5% with the symmetric support of other Big Four countries would save the market from a global oil surplus expected in 2016 and, accordingly, ensure a continuous decline in stocks and a steady rise in prices as soon as in the nearest months. However, the hopes did not come true. Admittedly, it was difficult to expect more from the Saudis in the current political situation. Caution has prevailed, but thanks for this result in any case: anyway, other partners in the negotiations get an additional warranty that the Saudis would not take over their market niche if production is reduced.

Iran could provide the greatest assistance in supporting prices: it is seen as the main “troublemaker” in the global market in 2016. If any circumstances arose that allowed Iran to delay expanding its supplies by 0.5-1 mln bbl/day at least for a year, the global oil surplus could end as soon as in mid-2016 and preconditions would appear for the start of a rise in prices. However, recovering the oil production is an obvious priority for Iran and it is difficult to imagine a sort of compensation that could be offered to Iran.

Other abilities to influence the oil market are even more illusive. It is important to gain the backing of stable production from Iran, but any significant reduction on its part is unlikely amid the war and the lack of other sources of revenues. It is difficult to imagine how one could urge the U.S. oil producers to speed up the reduction of their production. However, the promotion of “green” initiatives at the expense of fossil fuel producers could play a positive role here, even if this lead to oil replacement and undermine the position of oil exporters in the long-term. An example of such initiative is a recent proposal of the Obama administration to impose an additional tax on oil production at the rate of USD 10/bbl.

In any case, the growth of the world demand for oil will take its course: this gives confidence in overcoming the oil surplus by 2018. However, positive news is not expected in the nearest year either due to not very strong economy of major consumers and regular fevers on stock markets.

One must not bet on restoring the balance in the oil market in 2016 and, consequently, on a significant increase in prices - in the best case, they will stay in the range of USD 40-50/bbl. However, attempts to influence oil supply through diplomatic means should be continued. Currently, both OPEC actions and bilateral agreements of Russia with some producers do not look encouraging, but the likelihood of finding an international configuration to manage the supply still exists.

Even the fact of holding the negotiations that allows supporting prices for a short time due to verbal interventions has rather considerable tangible consequences. Currently, any change of the average annual price by USD 1/bbl costs at least RUB 100 bln to the Russian budget, so if we manage to raise the price by USD 1 at least for one day, this will bring a quarter of billion to the country.

The most probable development scenario is about retaining the global oil surplus at the last year's  level in 2016. Against the background of a large deviation from equilibrium and huge stocks, any price forecasting for several months does not make sense, as strong turbulence is likely. Stocks will start to clear up only by mid-2017 and then prices will be able to move closer to USD 60/bbl - the level that will ensure balanced supply and demand dynamics.

Source: Izvestia