Oil prices have been falling steadily for almost two months now. Slowly, but surely, Brent crude oil price have dripped from almost $115 a barrel around June 10 to about $103 on August 15.
Although geostrategic tensions are plenty, the market seems to be more concerned now about the fundamentals of supply and demand and the state of the world economy. In Europe, oil demand continues to fall as the economic recovery stalled in the second quarter. A contraction even for the German economy had been reported for the first quarter. Oil demand in the US and Europe fell by 440,000 barrels, a day according to the International Energy Agency (IEA).
The European sanctions on Russia over the problems in Ukraine are not expected to help either, with trade volumes and financial dealings between Russia and Europe expected to fall. Even China’s oil demand fell 2 per cent in July as compared to levels a year ago.
On the supply side, prices were pulled down by the continued increase in US oil production. The US Energy Information Administration (EIA) raised its estimate for 2014 production to 8.5 million barrels per day (mbd) and to 9.3 mbd for next year. This situation has reduced US crude oil imports from 7.737 mbd in May 2013 to 7.547 mbd in May 2014.
Yet the US is exporting 288,000 barrels a day and its net exports of petroleum products are 1.6 mbd; therefore, its net oil imports are to be adjusted by these numbers.
At the same time Canadian oil production is expected to increase as a new pipeline capacity will link an additional 600,000 barrels a day to the US hub at Cushing, Oklahoma, while the Seaway pipeline expansion will bring an additional 450,000 barrels a day to Houston.
In spite of the raging conflict in Libya, its exports increased in July to about 450,000 barrels a day, almost double what it from a month before that. The first oil to leave Ras Lanuf terminal happened a few days ago and after a year of closure.
Iraq problem
The bigger problem is in Iraq where the militants in the west and northwest of the country made huge advances early in June and controlled some important facilities. But that has not affected the oil exports from the south so far. The Kirkuk production stopped and the oilfields were taken over by the Kurdish regional government, much to the displeasure of the government in Baghdad.
Yet Kirkuk’s exports have been non-existent since early March after the pipeline to Turkey was sabotaged. Therefore, Iraq production has fallen from 3.41 mbd in February to 3.11 mbd in June. The slide has been arrested as evidenced by the July production of 3.1 mbd. The same picture emerges for exports as they fell from 2.8 mbd in February to 2.42 mbd in June and July.
That is to say that the loss of Kirkuk production has been partially compensated by increasing production in the south.
Even Saudi Arabia has gone beyond 10 mbd in July and the Opec output has risen to 30.44 mbd, the highest in five months, according to the IEA. (But the Opec Secretariat gives slightly less production numbers.)
It is difficult to say where oil prices are going now. The IEA and Opec have cut down estimates of world oil demand in 2014 to 1- and 1.1 mbd respectively, and demand growth forecast for 2015 may be 1.2 mbd only. US oil production will increase as stated earlier, and if things stay as they are Libya’s production may increase further.
But the situation in the country is fluid and warring rivals seems to be more determined. The situation can change suddenly for the worse and the government is helpless, to the extent that some people are seeking foreign intervention out of desperation.
In Iraq, in spite of the demise of the hated Nouri Al Maliki government, the new prime minister-designate is yet to form a government “widely supported” by Iraqis, a thing that is easy to say but very difficult to do after the bloody years of Maliki.
Oil companies have reduced their staff and therefore may not be able to meet production increases, which were expected early this year. Even in the north Kurdish region, Genel and the UAE’s Taqa have reduced staff as the insurgents turned their attention to that region. The US bombardment may have reduced the risk, but no one can predict what’s next or how far the US is willing to go in this conflict.
Prices in the futures markets are higher for prompt deliveries, which suggest that traders are not expecting low prices to last. The IEA is correct to say in its ‘Oil Market Report’ that the market is “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of oil producing world”.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.