No Refuge for Oil

O
f-late the monotonous oscillation of oil prices is making it difficult for writers and analysts to get any sense out of this whimsical trend. After the Vienna Oil deal in November 2016 and after the 21st January meeting between oil producers the oil prices have been moving up and down in the $50-$60 band.

Ever since the Kingdom of Saudi Arabia refused to play its part as a swing producer (in 2014) the oil markets turned topsy-turvy. What followed was an influx of extra oil which created a glut so huge that it is now proving almost difficult to flush it out. Despite 91% compliance from the oil producers vis-à-vis the oil deal the prices seems to be stuck in the aforesaid band. As noted many times the issue is that of the US Shale producers. This represents a perfect Catch-22 situation where the investors may find themselves dizzy by the vicious circle triggered whenever there is a cut in production. A production cut is all what everyone wants, yes, but after the production cut, due a mix of slight change in fundamentals and a huge alteration in speculations and sentiments, the oil prices start to move up. This is also a good omen. The next event, however, thwarts the rising hopes and prices as the US Shale producers-most of whom had stopped producing given the difference of cost of production- get back at the oil fields. When this happens, the supply-supposed to go down by the cut in production- once again starts to swell. And we, after making merry go rounds once again stand where we started from. Now-a-days, this is exactly what is happening: The oil prices every now and then rally up as the oil producers are fully complying with the November deal, but the Shale producers getting back at the derricks is a cause of continuous consternation. Last Friday Baker & Hughes reported a 17 rig increase in US oil rigs, making the total number at 583. Oil rigs have increased by 106 after the November oil deal. Many of the oil companies are back at their projects. BP signed a flurry of oil exploration deals and expects to increase the oil production, almost 800,000 bpd by the end of decade.

What, then, is the panacea? I am afraid there is none. The markets have to wait. Patience is the key here. If the OPEC and NOPEC producers remain true to the Vienna Deal-which is only for the first six months of the current year- it can still take a year or half for the oil glut to drain gradually. But a very relevant condition for this drainage to eventuate is Demand and it looks waning. China’s economy is not very promising. This price cap may, in future, effect the compliance of the oil producers as they do not see any potential effect of the deal.

There is a possibility: As Mr. Fereydoun, head of Vienna Energy Centre, said to me few weeks back that the OPEC should now try to bring the US shale producers on the table as well. But given their reduction in cost of production due to greater adaptability by the virtue of better technologies, it seems hardly possible. But in the long run, if US exercises far-sightedness, its willingness to cooperate with OPEC and other producers like Russia will only help create a better and stable oil market. The need for which is dire!

Osama Rizvi

Independent economic analyst, Writer and Editor

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