Oil Prices Rally Amid Lower US Output Estimates, OPEC Article

31 Aug 2015 | Author: | No comments yet »

Don’t set stock by the latest oil forecasts.

HOUSTON – U.S. crude prices shot up nearly $3 a barrel after OPEC said in a monthly publication it is ready to speak to other oil producers to achieve “fair and reasonable” prices. Oil prices turned higher Monday as traders digested a downward revision in U.S. oil-production data, an article released by the Organization of the Petroleum Exporting Countries and a drop in Canadian output.THE fluctuating and volatile oil prices may have hit global economy’s prospects of coming out of the doldrums, with Nigeria and other exporting countries reeling from the reality of scaled-down Gross Domestic Products (GDP) growth rate.During the early days of July each year, forecasts for oil supply and demand of the following year start to appear before being revised later if necessary.

After massive 10 week decline oil has posed overwhelming comeback in the last two days of the previous week, where price jumped as much as much as 18%. The global dimension of the crisis derived from the fact that crude oil remains the largest internationally traded commodity both in volume and value terms, with the fortunes of the hydrocarbon economy linked to prices of other fuels, energy-intensive goods and services. But this has to be on a level playing field,” said the group, which has its de facto leader in oil monolith Saudi Arabia said. “OPEC will protect its own interests.

The rebound of oil prices to $50 a barrel yesterday, has not assuaged the low feelings among the producing nations, as the rise, which was ascribed to the violence in Yemen, could be compromised this week by yet-to-abate economic crisis in China in particular and Asia in general. While Opec’s forecast of demand for oil and other liquids and the call on Opec’s crude oil were at 93.9 million barrels a day (mbd) and 30.1-mbd respectively, the adjustment made in the August report was only to raise the demand number to 94-mbd.

As developing countries, its members, whose economies rely heavily on this one precious resource, can ill afford to do otherwise.” West Texas crude climbed as high as $2.87 to $48.09 a barrel on the New York Mercantile Exchange, its highest point since the end of July. Oil prices fell to six-year lows last week but then soared Thursday and Friday, in a move most analysts attributed to traders closing out bets on lower prices.

In spite of higher production, OPEC doesn’t have much spare capacity, without significant investments, though Iran might extend its current production rate it won’t be sufficient to surpass demand. There may be an explanation for this as the organisations adjusted growth in demand for 2015 to 1.38- and 1.6-mbd respectively, such that the growth forecasts in 2016 are now closer for both. Russia, world’s largest producer is already operating close to its full capacity, and Russia at current stage in no position to invest in additional capacity, given low oil price.

The market took OPEC’s commentary Monday as a signal it may step off the pedal. “It all depends on what the Saudis want,” said Andy Lipow, president of Houston-based Lipow Oil Associates. “Members of OPEC are concerned about these low oil prices and it wouldn’t surprise me if they talked up the market without making any real changes to production. The Director-General of Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf observed that the hydro-carbon economy’s price crisis has assailed federal and state governments’ fiscal stability, “as reflected in the inability of many MDAs (Ministries, Departments and Agencies) at all levels of government to meet their financial obligations to contractors and civil servants. US producers have significant spare capacity and so far behave like swing producers, however with gloomy outlook the production in US unlikely to rise at rapid pace. The newly released federal data confirmed that U.S. oil output has taken a hit from lower oil prices, as new investments have proven uneconomic and some companies have struggled to stay afloat.

Of course, these are based on an estimated global economic growth of 3.2 per cent in 2015 and 3.5 per cent in 2016 … not bad considering the weakening of the China economy. The philosophy – a bull market takes birth, when participants are most bearish, has worked well in the past and we believe there is still possibility of a bull market in oil going ahead. From a fiscal perspective, these are certainly not the best of times for the economy.” The oil price slump had forced the continent’s top crude producer to cut its budget and deplete foreign currency reserves to unsuccessfully stem naira’s depreciation, which eventually fell by 7.8 per cent against the dollar this year.

Whatever the case, the events underline the concern of investors about the global economy and about what some call an impending currency war given the devaluation of the yuan and the recent announcements that the Federal Reserves will not raise interest rates in September. In the capital market, the All Share Index fell on the Nigerian Stock Exchange to the lowest level in six months last week, on concern that oil prices, which then hit a six-year low, would deepen the nation’s economic challenges.

The updated data “will encourage more bottom-picking,” as traders pile into the market in expectation that production will keep falling, said Olivier Jakob, managing director of oil-advisory firm Petromatrix. “We went through a wave of [production] increase, but now this is starting to come to an end.” Prices for Canadian synthetic crude for September delivery traded between 65 cents and $2 a barrel below the U.S. benchmark, according to brokerage Net Energy. Only last week, eminent lawyer and statesman, Chief Richard Akinjide, at the yearly conference of International Commercial Arbitration Congress in Lagos, warned that “it would take the next 25 years for the price of oil, in nominal value, to return to its 1980 level.” He added that “for the next 25 years, the booms and slumps of Nigeria’s economy would be dictated by the dull fluctuations of the international market.” Republication or redistribution of content provided by EconoTimes is expressly prohibited without the prior written consent of EconoTimes, except for personal and non-commercial use. The commercial stock levels of the OECD countries reached unprecedented levels at 2.916 billion barrels by early August, an increase of 210 million barrels over the last five-year average, according to IEA.

Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon. Global stocks are reported to be 4.446 billion barrels, including the strategic stocks of 1.588 billion barrels in addition to 900 million barrels on board sailing tankers. The increase in supplies is not just by Opec production’s over its agreed ceiling of 30-mbd but because all producers tried to boost production to counter the fall in prices. Department of Commerce reported surprisingly strong GDP figures – the U.S. economy expanded at an annualized rate of 3.7 percent, a huge upward revision from previous estimates.

Therefore, the Iranian Oil Minister Zanganeh spoke on August 26 on state television about the importance of not losing market share and that “protecting Iran’s share in Opec and the world markets is our vital parameter.” The expectation that non-OPEC production may fall in 2016 may not necessarily raise prices, even if current Opec production remains the same. Reuters analyst John Kemp has watched this situation closely and had been expecting a correction was coming, although the timing and magnitude were impossible to predict.

If prices are already low, at some point they are theoretically nearing a bottom, so traders should logically start to pull back from their short positions. Then, once speculators realize the market has oversold, prices whipsaw back in the other direction, even if the surplus in the physical market remains. “It’s all very similar to blackjack,” Thomas Rollinger, the chief investment officer of Chicago-based Red Rock Capital, told Reuters, referring to the risk of oil speculation. “Basically you’re not going to win at every hand.”

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