Oil price recovery still long way ahead
The price of oil plunged in the second half of 2014 when it became apparent that production was outpacing global demand. There were a number of drivers that brought about the free-fall of crude prices which include rising US tight oil production. The rise in US production last year of 1.5 million barrels per day was the third largest in the history of the global oil industry.
Other factors are slowing economic growth, particularly in China; a warm start to the North American winter; a temporary return of Libyan oil production; and OPEC’s decision at its November 2014 meeting to not function as a swing producer.
Oil’s drop has hurt smaller OPEC members including Nigeria. Some OPEC’s members continue to lobby for output cuts and an emergency OPEC meeting.
Rex Tillerson, Exxon Mobil CEO expects the price of oil to remain low over the next two years because of ample global supplies and relatively weak economic growth.
Tillerson in a presentation to investors at the company’s annual investor conference in New York, outlined its business plans through 2017, Exxon assumes a price of $55 a barrel for global crude. That’s $5 below where Brent crude, the most important global benchmark currently trades on, about half of what Brent averaged between 2011 and the middle of last year.
Tillerson cautioned that geopolitical turmoil could unexpectedly send prices higher. But he said that if tensions calm, much more oil is ready to hit the market.
The recovery of the global oil market from sharply lower oil prices will be gradual, and it will be driven mostly by a supply response, said Marianne Kah, ConocoPhillips Chief Economist.
Kah noted that global oil demand growth over the last half-dozen years has not been as robust as it could have been, due to the fact that “we’ve seen a very moderate global recovery from the 2008-2009 financial crisis. You have to remember that Chinese economic growth and diesel demand growth were the primary drivers of high oil prices in the mid-2000s.”
Another factor playing into the oil price equation, said Kah, is per-capita usage of oil in Western industrialized countries. “There is no doubt that the world is less oil-intensive these days,” she explained. “If the world had the same oil intensity today, that it had in 1985, then we would have oil demand of 135 MMbpd instead of 90 MMbpd.”
Bob Dudley, BP CEO comments recently reflect an increasingly common industry view that new sources of oil around the globe, relatively slow growth in demand, and large amounts of crude in storage will keep a lid on prices for the foreseeable future.
Meanwhile, Saudi Arabia’s oil minister said he expected oil prices, which hit a near six-year low in January, to stabilize, signalling cautious optimistism about the market outlook.
Giving a speech in the German capital, Ali al-Naimi also urged non-OPEC producers to help balance the oil market, saying it was not up to Saudi Arabia to subsidize higher-cost producers and that circumstances required non-OPEC to cooperate.
The comments are a further sign OPEC’s top producer is sticking to its policy to defend market share. Last month, Naimi signalled satisfaction with developments, saying he saw oil demand growing and that markets were “calm”.
Production in Libya has been erratic in recent years because of political upheaval there. Production in Iran, once OPEC’s second largest exporter, has been depressed in recent years because of Western sanctions. Those sanctions could be eased if current talks over Iran’s nuclear program make progress.
Brent crude rose above $61 a barrel supported by geopolitical tensions in Libya and Iraq, while traders eyed the outcome of Iran nuclear talks for further trading cues.
FRANK UZUEGBUNAM