Oil bear market amid pyrrhic victories

By Sony Atumah

The global crude oil market witnessed another fall in the price of the West Texas Intermediate, WTI from a cliff in the mid-fifties down the low forties. OPEC and non-OPEC members cut production by 1.8 million barrels per day to stabilize prices in their November 2016 meeting in the OPEC headquarters Vienna. The production cut led to a temporary rally in crude prices up to US$55 in January with hopes that it would rebalance supply and demand.

The price of the WTI crude last Thursday appreciated marginally to US$45.10; below expectations thus discounting the OPEC and non-OPEC cuts. Experts have described what has happened to oil prices since February 2017 as the worst half recorded in 20 years. Analysts doubt whether the nine-month extension till March 2018 would shore up prices or reduce oversupply. The statistics show that prices went down 22 percent in the first half of this year thus indicating a bear market.

Although the United States Energy Information Administration, EIA gave a lean inventory build of crude oil last Wednesday against the American Petroleum Institute, API figure the previous day, it is obvious that the American shale production increased global oil inventories arithmetically far and above the OPEC oil freeze volumes thus contributing to low crude prices being experienced.

Erroneously many have been made to believe that the exempt in production cut of two OPEC members, Nigeria and Libya (due to internal crises) contributed significantly to OPEC’s inability to achieve desired result of higher crude prices and low inventory. Agreed Libya added 935,000 barrels this week up from 885,000 barrels the previous week coupled with a projection that Nigeria’s production would raise by 62,000 barrels per day in August. These countries and noncompliant Iraq pump more to the market.

But the sentiments and emotions started in the seesaw between the shale producers and OPEC members showdown which ran riot in the harmful tumble in crude prices in July 2014. This has caused price to oscillate between US$40 and US$60 per barrel. The ding-donging over market share and price control continually witnessed advantage shifting from the United States to OPEC members and vice versa. The benefit or otherwise of this trend is a global rhetorical question which normative economics may not provide answers excepting a cut above ego.

Energy Analyst and Consultant David Blackmon writing for Oilprice.com ordinarily enumerated factors for this trend as global supply, global demand, economic growth or contraction, regional conflicts, export limitation agreements, the weather and more will no doubt have a temporary or ongoing influence on oil price in the coming months up to 2018, as they always have in the past.

But the undercurrents of shale producers’ survivals in the price downturn are the deployment of internal corporate mechanisms in budgeting and allocating capital resources to drilling programmes. These processes are employed to cut costs, increase efficiencies, advantages of economies of scale, refine drilling and frackking programmes and advanced technologies. Shale oil producers have intensified technological research and with generous incentives including hedges continued to give signals and threats that their production cost would soon have a breakeven to cripple conventional oil produced by OPEC.

Experts have advised producers to change their strategies in exploration and production to avert utter global petroleum chaos. Recent developments have made investors to be extremely cautious. If prices remain low for years international oil companies may experience cash flow problems for exploration. Hedge funds are wary of undesirable exposures after the nine month OPEC oil freeze extension that would end in March 2018. Recourse to hedges may not be effective because banks move towards where markets are in their favour.

Many OPEC economies are teetering in serial budget imbalances and hoping to hop, skip and jump to realistic economic rhythms. The fears of rising global oil supply counterbalancing OPEC’s oil freeze has called for extreme caution because an extension of production cut after March 2018 may not be guaranteed. Iranian Oil Minister, Bijan Namdar Zanganeh expressed fears of a consensus at the expiration the present cut in 2018. Zanganeh feels that an additional 700,000 barrels per day cut by March may solve the problem.

OPEC and non-OPEC technical committee on production enforcement was said to have examined the scenario including Nigeria and Libya’s exempt in the production cuts. Apart from Saudi Arabia and some Gulf Cooperation Council, GCC members, other OPEC members have high breakeven points in crude production. It is not clear whether OPEC led by Nigeria’s Mohammed Barkindo may decide to throw in by oversupplying the market to send a strong signal to shale producers that it can be a free-for-all. It is however in OPEC’s interest to wrap up its oil victory in price, volume produced and sold to give the desired revenue and bull market share.

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