Matt Stanley, Fuel Oil Broker in the FIS Dubai office took part in the second Mare Forum Dubai at the end of January. In his presentation Stanley discussed the pressures on the oil market created by the recent price fall and the changes that lie behind it.
The oil price has dropped by around 60% since June and is trading currently at $48 per barrel but will it stay there? Our recent discussions with major commodity trading houses confirm their belief that crude will stay in a $50-$60 range for as long as two to three years.
Although no oil major, or any trading house for that matter, has a crystal ball, this opinion matters, especially as it has such a big impact on each company’s investment and staffing ambitions over the next decade.
New production of oil is at an all-time high. Current price levels will leave North Sea companies with stakes in older fields the hardest hit. Production costs here are on a rising trend and the profitable life of their assets will be significantly shortened if the oil price does not recover in the short term.
As some economists have pointed out, Scottish Nationalist leader Alex Salmond is perhaps grateful not to have won last year’s independence referendum. If negotiations were taking place now on the fiscal settlement for an autonomous Scotland, he would be struggling to fill a very substantial black hole in tax revenues stemming from the fall in oil price and indeed the sentiment going forward on oil output at current levels.
The main reason the market expects the oil price to stay within the $50-$60 range for some years is perhaps provided by the Middle East crude producers, who appear determined to defend market share against what they see as the threat from US shale production.
The Iraqi oil minister announced on January 19 that crude oil production has hit an all-time high of 4m barrels per day. The market is already over supplied and some could argue that this latest announcement is one that purely flexes muscles rather than gives any sort of market direction.
This, in other words, means keeping the volume of oil production high enough such that the oil price remains low enough to ‘wipe out’ the arguably excessive number of US shale producers – bankrupting the high-cost fracking operators which have borrowed colossal sums to finance their investment.
This is not meant with malice: it is simply intended to put some US frackers out of business – enough that banks and investors are burned too, such that the supply of investment cash for shale projects dries up.
Viewed on a macro level, what we are seeing in the oil market is a massive shift in corporate and economic power from oil producers to oil consumers. ‘Robust’ producing countries such as Norway are wincing while a massive importer and manufacturer like China is quietly grateful that its own difficult economic sustainability is somewhat relieved by the tumbling price of energy.