Lessons learnt from first half of 2015
On June 19, 2014, NYMEX contracts traded at $106 per barrel while Brent peaked at almost $116 per barrel on the same day. Reopening of Libya’s ports and oilfields in late June (two tankers loading 1.3 million barrels) signaled first real pronounced concerns around potential oversupply and a steady decline in crude oil prices followed. By mid-September, Brent fell below $100 and fell below $90 in mid-October.
Late 2014, oil producers began to cut capital expenditure (CAPEX) with every E&P Company announcing preliminary 2015 CAPEX budgets and many producers lowering its estimated budget in excess of 20 percent for 2015. In early 2015, another round of CAPEX cuts occurred and many producers announced that they will defer completion work to 2H 2015 or to 2016.
Volatility still synonymous with crude oil
Oil prices remained volatile for the first half of 2015 leaving investors wondering if another leg down is on the horizon. The price of oil has been on a wild ride for the past year. However, for most of May and June the price of crude was rather stable at about $60 per barrel. Driving this stability was the steadily falling US rig count, which suggested that oil production in the US was heading for a decline. It also didn’t hurt that global oil demand was showing signs of accelerating.
Unfortunately, that stability was shattered again as the price of oil plunged by end of June. It was a plunge that hinted that maybe the oil industry has not fixed all of its problems just yet. Further, it instilled fear among investors that oil prices could be primed for another leg down, with some suggesting that oil could retest its lows from earlier in the year. With uncertainty regaining its stranglehold on the oil market here’s a look at where oil prices might go next.
The slide was mainly fueled by global growth worries. Greece’s rejection of the bailout terms and China’s nearly unrelenting stock market slide had many investors worried that the global economy is about to hit the skids. That slowdown would most certainly impact crude oil demand, which is just starting to accelerate.
In all honesty oil prices could go either way. If China’s oil demand does start to crumble then it could take the price of oil down with it. That’s really the biggest risk to oil prices right now. That said, if China’s problems don’t grow worse and its stock market begins to rebound it could lead to a rather quick rebound in the price of oil.
OPEC still a factor
Organization of the Petroleum Exporting Countries’ (OPEC) market influence is expected to grow, but the 12-member group might not return to its pre-recession glory, according to the International Energy Agency. OPEC in late November 2014 opted to keep production levels static to protect a market share influenced by rising US oil production. The 12-member group still holds considerable influence over the global market, but IEA Executive Director Maria van der Hoeven said its status is waning.
As OPEC ’s refusal to curb oil production contributes to the plunge in prices, the organization vowed to defend its market share against higher-cost producers such as US shale drillers and companies developing Canada’s oil sands. Its strategy hinges on the odds that an extended period of low prices will lead other producers to scale back output, enabling the group to reassert its influence.
The number of US oil-drilling rigs has fallen sharply since oil prices headed south last year. There are now about 61 percent fewer rigs working since a peak of 1,609 in October.
Iran may re-draw oil map for rest of 2015
Iran, the US and its allies are pushing ahead with talks over a nuclear deal that would re-draw oil map for the rest of 2015. Iranian exports in recent years have been essentially capped by Western sanctions aimed at pressuring Tehran over its nuclear ambitions. A deal easing those sanctions could eventually translate into half a million barrels or more a day in Iranian crude heading into a currently glutted global market, analysts estimate.
While a deal is far from certain, Bijan Zanganeh, Iran’s Oil Minister said that the country could double its exports quickly.
Iran has already sounded out Asian oil buyers about taking extra supplies, according to two Iranian oil officials. Iran could perhaps export as much as 800,000 additional barrels a day, within a year if they had a market to take their crude to.
FRANK UZUEGBUNAM