The last time I wrote about oil prices I said the outlook in 2014 is for more of the same as far as prices were concerned. The last few weeks consolidates this view though oil prices have been more volatile.
The average price for the Opec basket of crude oils so far this year is $104.71 a barrel as compared to the 2013 average of $105.87 a barrel. The latest price for the basket is about $107 a barrel. Therefore, prices are still expected to be in a range of $100-110 a barrel, an acceptable range to producers and consumers according to a recent interview with Abdullah Salem Al Badri, Opec’s secretary-general.
Other markers displayed similar trends where on February 19 US West Texas Intermediate (WTI) reached the highest level for four months at $100.37 and Brent around $110 a barrel.
The market has been supported by the bitter cold weather in North America and further signs of economic recovery in the US and even in Europe. At the same time OECD industry oil stocks are drawn fast compared to their level few months ago. At the end of last year oil stocks were at 2,559 million barrels or 103 million barrels below the last five years average.
Oil demand growth in the OECD countries rebounded in the second-half of 2013, which will improve the outlook for oil demand this year, though non-OECD countries are still the main drivers of demand that is expected to rise by 1.3 million barrels a day (mbd), or about 100,000 barrels a day higher than the growth in 2013, according to the International Energy Agency’s (IEA) February Oil Market Report.
The same report forecast non-Opec supply growth for 2014 (including Opec NGL) at 1.7 mbd, which means that there is no room for Opec to increase its production, which is now just less than 30 mbd. The 2014 required production from Opec is not expected to be higher than 29.5 mbd.
That Opec numbers for supply and demand growth are different from those of IEA could be for definitional reasons. However, the end result is more or less the same as Opec forecasts the average need for Opec crude oil in 2014 at 29.6 mbd.
The forecasts are driven by the expected growth of the world economy at 3.5 per cent compared to 2.9 per cent in 2013, with the recent trend in the OECD compensating for the relative slowdown in the rest of the world.
But the IEA always presses the panic button too quickly, when on February 20 it said: “Far from drowning in oil, markets have had to dig deeply into inventories to meet unexpectedly strong demand” and urged Opec “to skip a seasonal output drop as stocks touch six-year lows”. But Opec is not expected to meet until June and, therefore, it is unlikely to bother with lower demand in the second quarter of the year and stocks can be rebuilt.
Notwithstanding the above, oil prices have been supported by problems in a number of producing countries as well. Libyan production is only 0.5 mbd compared to 1.6 mbd expected from that country due to the political turmoil which does not seem to be fading. Iraq production is not rising as fast as planned and in fact fell in January to 2.99 mbd, or 140,000 barrels a day lower than December. The problems in Syria, Yemen and South Sudan are curtailing supplies as the uncertainty and political conflicts continue.
But there is also the possibility of enhanced supplies if the above problems are ameliorated or if the negotiation between Iran and its Western adversaries conclude with a permanent agreement that will allow Iran to export almost an additional 1 mbd. Even Iraq can put additional crude on the market if the country grows out of its daily violence and government inability. But all these are wishes of some rather than a realistic assessment of the situations.
I have to point to an interesting article by Alsir Sidahmed, honorary research Fellow at the Institute for Middle Eastern and Islamic Studies, published in ‘Arab News’ on February 17 where he said that major companies are not finding sufficient oil in spite of their staggering spending and that they may be forced to cut to satisfy their shareholders and that will give more room to Opec. Shareholders cannot be satisfied when investment and production costs are rising while revenues are not.
Let us hope that my prediction of “more of the same” holds for the rest of the year.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.