At the Dubai Oil Forum organised by Platts recently, I listened to a very interesting presentation titled ‘From West to East: Decline and Growth in Global Markets’. It was given by Jorge Montepeque, global editorial director for Platts Price Group.
The speaker eloquently took the audience away from the daily, and sometimes contradictory, signals in the oil market by concentrating on global petroleum trends as evidenced by what happened in the last few years. The oil market with respect to price movements has often been volatile. That is to say price swings are frequent and large.
But in the last couple of years, the market has been progressively less volatile as measured by the standard deviation of prices from their mean. The dated Brent crude oil price has been hovering around $110 a barrel without too much variation. The same is followed by Dubai crude oil and the differential between the two crudes is even less volatile than price volatility of either crude oil.
Does this mean we will continue to see this trend and that the oil market will be more stable? Let us hope so, but no one would be surprised if volatility came back strongly. The oil market is too complex to be judged by just the last two years.
WTI role declining
On the role of the marker crude oils, the presentation stressed the fact that the role of the American marker West Texas Intermediate (WTI) is declining. Its traded volume in the futures market reached a maximum of 8.3 million contracts in 2011, which went down to 7 million in 2013. WTI volume is going down and so far there has been no attempt to couple it with near similar crudes to maintain the volume.
At the same time, the transportation difficulties of crude oil within the US decoupled WTI from the international market.
In contrast, the role of Brent crude oil as a marker is rising, where the volume traded rose from 3.5 million contracts in 2009 to 7.5 million in 2013 and likely to be higher as more buyers and sellers switch to Brent. Although Brent crude volume is declining, liquidity has been maintained by the addition of Fortis, Oesberg and Ekofisk crudes, which are close in quality.
It is not clear how long this will serve the purpose of a marker since even the volume of this combination is seeing a decline, where it was 1.78 million barrels a day (mbd) in January 2005 and only 0.8mbd in January 2014. The trend is unlikely to reverse.
Other markers such as Dubai have a long way to go and perhaps more types and volumes of Gulf crudes are needed.
Generally speaking, the US market is characterised by increasing crude oil production and products exports. US production in February was 8.1mbd or 3mbd above the 2006’s. Of course, this is due to rising production of shale oil. US crude oil imports have gone down from 10.75mbd in mid-2006 to 7.75mbd in mid-2013.
There is a long way to go before the US becomes self-sufficient. Although most of its imports are from the Western hemisphere, its dependence on Middle East crude imports last year was still substantial at almost 2mbd from Saudi Arabia, Iraq and Kuwait. Product exports from the US have risen from 1.9mbd in June 2010 to 3.7mbd in February this year.
Demand stagnant in Europe
The situation in Europe is different, with crude oil production on the decline and oil demand stagnant. Europe is more dependent on product imports. The refinery throughput declined from 13mbd in July 2005 to 10mbd in July 2013.
In the Middle East and Asia, crude oil production is increasing and so is refinery capacity. Both are salvaged by increasing demand for oil and products. For example, Chinese refinery throughput in 2013 increased to 10mbd and its crude oil import is now 6mbd compared to the US’ 7.5mbd.
The top crude oil producers (in mbd) in 2013 were Russia (10.04), Saudi Arabia (9.39), the US (7.5), China (4.17), Iraq (3.03) and Iran (2.7). Their combined production of 37.03mbd is higher by 0.53mbd over that of 2012 though the US alone increased its production by just over 1mbd.
In my view, supply may increase further, especially from the US and Iraq. If sanctions on Iran are reduced or removed, then a further increase is likely. This expectation alone may explain the recent decline in crude oil prices.
Given the above, in the days ahead Opec may need to adjust its production to maintain prices at a reasonable level.
— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.