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Shale growth, Geopolitical tensions and Re-balancing

Osama Rizvi

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It has been a wild ride for oil prices. November 4th, 2017, prime minister of Lebanon Mr. Hariri resigns, at night missiles from rebel occupied Yemen can be seen hurtling across the sky of Kingdom of Saudi Arabia. What begins next has been widely covered by all the major media outlets.

From being termed as a ‘power grab’ to a ‘political purge’ the brusque wave of accountability has scalped all the big guns of the country. Arrests of Prince Alwaleed bin Talal and head of National Guard Miteb bin Abdullah, supposed to be the top contender in the candidature for the Kingship, were quite appalling.

Besides the diplomatic and political comeuppances of these actions, its effect on oil prices was glaring as well. Gaining more than 20 percent in four weeks oil prices crossed $64 a barrel, the highest since 2014 crisis. The gains were further supported by tensions in Iraq and certainty regarding the extension of Vienna accord when the oil producers will meet on 30th November, 2017. Also, in the background was the promising picture of recent inventory withdraws and falling rig count. The oil price rally was the reflection of positive sentiments and high hopes of oil markets and investors as they enjoyed this temporary rally and deemed it as a precursor to the coming stability in the market- a hasty and unfounded conclusion.

That some of the observers were bedazzled by the bright prospective of the oil markets hence ignoring the other side of the equation is completely natural but not logical. I have talked, in my previous article, of the vicious circle (and we all know what that is) which is triggered by an uptick in price translating into a surge in US shale production subsequently hindering an sustainable oil rally which in turn results into a fall in prices. A sort of euthanasia.  It is also important here to slightly touch upon the two factors that can bring in the required ‘sustainability’ factor in these rallies that, now and again, burst forth but fall short of forming any new, higher and permanent floor to prices. One is demand, the second is a reduction in supply by the oil producers (note that production cuts are different from freezing production, which is in place).

ussaudi

This takes us to, what has been termed, a bearish report published by International Energy Agency (IEA) this month. The IEA has lowered its demand forecast by 50,000 bpd and 190,000 bpd for 2017 and 2018 respectively. The report also posited that oil markets might be oversupplied in the fourth quarter of 2017 raising concerns amidst investors. This report is antithetical to what OPEC published last week injecting optimism through mentioning high levels of conformity and touting the total 151,000 bpd reduction in output in the month of October. Other important points include the addition of 1.4 mbpd of oil supply by U.S. shale next year which will easily offset the effects of Vienna accord.

The bearishness doesn’t end here. An article in Bloomberg, torches upon the long-term prospects of U.S. and thereof oil prices. “By 2025, the growth in American oil production will equal that achieved by Saudi Arabia at the height of its expansion, and increases in natural gas will surpass those of the former Soviet Union”, the article said.

The article further goes on to quote Mr. Fatih Birol, IEA Executive Director that “The United States will be the undisputed leader of global oil and gas markets for decades to come”. The price estimate for 2025 in the World Energy Outlook report was changed from $101 previously to $83 and from $125 to $111 for 2040.

In the short-term, however, tensions between Riyadh and Tehran can escalate resulting in a sharp spike in oil prices. But that will be, once again, an ephemeral one. For a substantial rise in oil prices and for markets to re-balance in the true sense, as mentioned earlier, only either by an increase in demand and/or deeper cuts. For the former, even if it happens, we will have to wait and see. The latter might not happen. An extension, yes, but once again—will that be enough?

For now, expect the vicious circle, to play its part every time you see a rally that is not based on a change in fundamentals.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

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Market Insights

Oil Markets Ignoring Realities

Osama Rizvi

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Brent oil touched $68 last week. WTI is already past $60 mark. Inventories are down by 20% nearing to the five year moving average of 420 million barrels. But all is not hunky-dory with the oil markets. There are some wildcards at play right now. Temporary factors, driving prices up. The markets and observers need not to lose sight of what are the potential risks to this upbeat and probably short-lived phase of recovery.

Last year we saw the Kurdish referendum which resulted in a price hike. However, we didn’t know that 2018 will have another big surprise (distressing one) in its stock: Unrests in Iran. Slogans like “Death to Khamenei” cannot be taken lightly. Nor the killings that have ensued as a result of these protests. Government has warned to deal with an “iron fist” in order to control the situation which only seems to get worse. This is one of the factors that are drawing oil prices up, representing the typical relationship between any unrest/disorder/conflict in Middle-East resulting into a higher oil price. But matters are not that simple. If these unrests can translate into a higher oil price, it can also cause Iran, in case tensions escalate, to leave the Vienna accord. This can be due to more sanctions slapped upon the regime in case they take any serious action against the protesters or due to general economic problems that might result, once again, if matters exacerbate.

Pipeline outages also helped to provide some buoyancy to oil prices. Disruptions in Forties Pipeline, one of the most important in the world, gave prices a boost when the company announced that it can take a longer time to repair the hairline crack that appeared in December, 2017. However it is fully operational as of now.

The recent meeting wherein members of Vienna accord decided to extend their deal for the full 2018 year was another cause of merriment for the oil markets. But that caveat according to which the members will meet again in June to review the situation can be taken as a wicket-gate for the ones who want an exit. Russia has already signaled to take about an exit strategy. The oil executives in Russia are not happy to see the growing U.S. shale production and market share.Kingdom of Saudi Arabia has its own reasons. They have an IPO to take care of hence; they are trying to keep all these oil producers together. But the question might be asked: For how long? It is their company (Aramco) and their IPO. Not every country in the region has a plan to wean itself off oil.

What has become a necessary part of the narrative whenever discussion the future of oil, in terms of prices or usage, is of-course, United States of America. U.S’ shale production has risen from 8 million barrels in 2016 to 9.78 million barrels per day (latest). The estimates for future rise in US production are promising. What is also important, but obvious, to mention here about the vicious cycle that higher oil prices trigger. The solution to which is only a stronger demand.

Even though oil prices are at post-crisis high it doesn’t mean that the trend will continue. Sustainability is the most important and decisive factor. Geopolitical risk premiums are temporary. So are the pipeline outages (if in case there are any in future). Time and again, we have to remind ourselves of not getting carried away by these ephemeral rallies. We should look for something sustainable, permanent, and fundamental. Until or unless we find it, the search for higher oil prices should continue.

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Market Insights

Crude Oil Bearishness Is Here To Stay

Osama Rizvi

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Despite seven weeks of inventory withdrawals, the global oil market has failed to translate this effect into a sustainable and significant oil price increase.  Doubts remain.  As reported, OPEC production has edged up. The compliance rate among OPEC and NOPEC members of the Vienna deal, extended to March 2018, has fallen. US production has added more barrels to global production.

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Market Insights

Sharing the Economy

Osama Rizvi

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] G [/yt_dropcap]one are the days to fret over the fact that you have no car and the weather is perfect to dine out tonight. Call yourself an Uber. If you are in China Didi will work. Peer to peer lending, fashion sites like Le Tote allowing women to “rent designer gowns for a special event at a fraction of the price of buying a new one” and Neighborgoods that allow you to borrow resources are changing the way we use to do and perceive business.

(more…)

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