The price war continues, but oil might rise soon

The price war continues, but oil might rise soon

While OPEC decided to continue the price war at its December meeting, the downturn in oil prices might end in 2016, due to rebalancing in global supply and demand.

OPEC’s December meeting did not bring too many surprises. The Cartel would maintain its current levels of productions in order to preserve market share, and “continue to closely monitor developments” until the next meeting in June 2016. At the moment, the organization produces 31.5 million barrels per day.

The decision reflects deep disagreements between Saudi Arabia and other member countries surrounding the current policy of relentless production, but also the need to accommodate Iran’s production, which is likely to rise by 500 000 barrels per day in the six months of sanctions ending.

Iran made it very clear that the country would step-up its production to 4 million barrels, regardless of OPEC’s decision. Other countries like Venezuela, Angola, Nigeria and Ecuador will have to continue to cope with the descending spiral that has plagued the oil markets over the last 18 months. This is bad news for the Maduro regime in Venezuela, which is set to lose the parliamentary elections taking place on 6 December, and for the Nigerian economy, which to a large extent depends on oil revenues. Even Saudi Arabia and Russia, with their robust hard currency reserves, might start to feel the bite.

The continuation of unrestricted production policy that started in October 2014 would immediately put additional pressure on oil prices that currently hover between $42 and $44 per barrel.

It is obvious now that the period of low prices will continue for some time, and the oil glut might slash the prices even further. Apart from economic and political earthquakes in oil producing countries, the downfall will have a long-term negative impact on oil industry worldwide.

The oil and gas industry invested 21% less in E&P, compared to 2014, and it is expected that investments would fall by another 5-15% in 2016. This is primarily related to more capital and technology demanding offshore, LNG, shale and oil sands projects.

As a consequence, the production in non-OEC countries will inevitably fall, and by 2020 it should plunge by 2 million barrels per day. However, the markets will start to reflect this only in mid 2016 and 2017, when the prices might begin to rise again.

The most realistic scenario is that the Brent prices will go up to $60-$80 levels by 2020, while the supply and demand rebalancing could start to affect prices already in 2016. But not all ‘high cost’ producers can expect to gain equally. With its ability to quickly resume output and cut costs, the US shale sector will likely manage to accommodate these levels, but more costly Arctic projects and Canadian oil sands will continue to struggle.

The relative winner of the current war of barrels will be the OPEC countries, as they will eventually reap the greatest benefits if this scenario proves to be right. With low costs and the production in full swing, they will have no trouble in replenishing most of supply gaps in the short term. At the same time, all OPEC countries would have to go through painful process of fiscal consolidation in line with the new market realities.

 

By pursuing the policy of unrestricted production over the past year, Saudi Arabia did succeed in damaging primarily the American shale industry, and preserving its market position.

But with the United States becoming a major producer, the oil economy dynamics has been irreversibly changed, as it is obvious that the current Opec’s policy will not ‘kill’ the shale revolution. As a consequence, the Cartel in effect lost much of its initial purpose to act as the swing producer and it cannot expect to regain such arbitrary position in the near future.

About Author

Ante Batovic

Ante was previously a lecturer in International History at the University of Zadar where he specialised in Cold War and East European history. He was also a visiting fellow at the LSE IDEAS centre and the fellow of the Robert Schuman Foundation in the European Parliament. He holds a master’s degree in Global Politics from the London School of Economics and a PhD from the University of Zadar.