Iraq Sees Crude Oil Prices Rising on Strong Market Fundamentals

23 Dec 2015 | Author: | No comments yet »

Boom-bust cycle jerks reins out of Opec’s hands.

Crude prices are set to rise from current “very low” levels that are hurting producers, Iraq’s Oil Minister Adel Abdul Mahdi said after a meeting of Arab petroleum-exporting nations.TEHRAN, Dec. 20 (MNA) – Director of Petro Scotland expressed his skepticism towards IEA forecasts, saying that once the oil price approaches $60/barrel for any length of time, there are some possibilities to lead to the oil price collapsing again.West Texas Intermediate for January delivery, the front-month contract, was down 5 cents to $35.47 a barrel by 07.42 GMT after finishing down almost 5 per cent on Wednesday.From a low of US$9.10 per barrel in late 1998, oil prices escalated almost unrelentingly to $144 in July 2008, crashed below $34 in December in the financial crisis, rebounded to $128 in March 2012 on Middle East geopolitical turmoil and have now slumped again to around $36.

Abdul Mahdi, whose country is the second-biggest producer in OPEC, didn’t forecast when prices would rebound from an almost seven-year low for Brent, the benchmark for more than half of the world’s oil. Qatar’s Energy Minister Mohammed Al Sada told reporters before the meeting in Cairo there was no need to be pessimistic about prices. “There is no doubt that oil prices will rebound,” Abdul Mahdi told reporters after the meeting of the Organization of Arab Petroleum Exporting Countries. “This current level is too low, and it’s affecting oil producers. Iran is trying to lure back international oil companies to develop its vast oil and gas reserves once sanctions are lifted under a deal with world powers, and recently lifting of four of them on Iran’s petrochemical industry. United States crude stocks went up last week too since Gulf Coast imports went up and the data presented by the EIA on Wednesday surprised analysts who were expecting the inventories to fall.

I think economic factors and fundamentals are still strong.” A global oversupply of crude has triggered the worst slump in the energy business since the 2008 world financial crisis. Crude stockpiles have expanded to 490.7 million barrels, the highest for this time of year since 1930, the Energy Information Administration reported. A provocative new paper by Robert McNally of Columbia University argues that Opec’s market management role did not end with the recent rise of US shale oil. Even the upgrade of existing infrastructure takes considerable time to mobilise even when financing is both available and deliverable into the contractors’ bank accounts. The dollar hit a 2-week high against a basket of currencies, making oil and other commodities denominated in the greenback less affordable to users of the euro among others.

And it has no intention of cutting its own production unilaterally (or with some limited assistance from GCC allies), ceding market share to geopolitical rivals or non-Opec competitors. OAPEC was established in 1968 to foster the development of the petroleum industry in member states as part of an economic integration plan among Arab countries. In the short term, unwise action by Iran – such as dumping oil stored in tankers on the market, or rapidly ramping up production to sell into the market – can benefit only the buyers, who will probably think that Christmas has come early! It is not possible for prices to be high and stable, except during temporary periods when disruptions are coincidentally matched by new supply, as in 2012 to the middle of last year. Saudi proclamations in September last year that “the high cost of producing shale oil … means the price of oil will not go to less than $90” now appear wildly optimistic.

Equilibrium was always vulnerable to any race by a low-cost producer for market share, but sanctions and mismanagement in Iraq and Iran meant that only Venezuela tried this strategy – with ruinous economic and political consequences. The IEA said in a monthly report in December that growth in demand for oil will ease next year to 1.2 million barrels per day, from 1.8 million barrels a day this year. After that, the halt in investments in long lead-time, high-cost areas such as oil sands and deepwater (and the Arctic, though its importance is exaggerated), the travails of Iraq and the financial damage inflicted on shale oil companies would constrain output, and prices would ascend back towards the sunlit uplands of $100 per barrel. Firstly, the IEA assumes that consumer nations will be able to pay for increased demand no matter what the price is, and this is manifestly not the case.

Volatility would remain, but the cycles would be compressed, on the order of a year or less, perhaps superimposed on the industry’s traditional decadal rhythm. Secondly, it is impossible to tell how much of China’s demand in particular is for refining and consumption, and how much is simply for storage both as a strategic reserve and on the premise that at the zero $ interest rates which applied until last Wednesday, reserves of oil also represented a better investment than holding reserves of dollars.

In the third case, intense competition for Opec market share between Riyadh, Tehran, Baghdad and perhaps Tripoli and Caracas, cost reductions by petroleum companies, continuing technical innovation by shale oil producers and tepid global demand would keep prices low and rather stable, in a rerun of the 1986-1999 period. Finally, in answer to your question concerning production cuts, this lack of co-operation is a consequence of the existing dysfunctional market model of ‘oil-as-a-commodity’ where oil is bought and sold for transaction profit by middlemen.

I believe that it is now possible – indeed essential – for Iran to lead a market transition to supply oil directly to refiners on a partnership basis of production sharing with refiners in entitlements to products. Such an oil for product swap is in the interests of everyone other than those who seek something for nothing, and it gives rise to an energy-as-a-service market model where collaboration and transparency are in everyone’s interests. What will be the effect of offshore development and rig building, having lower costs, on oil market prices and how will it be affected by the current oil market situation?

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