Anthony McAuley
The world’s major oil suppliers have for several months now been getting anxious about what lies over the horizon.
There has been an uneasy sense of calm since the unexpectedly solid recovery in oil prices and the nadir in January, when a cliff-face slide of more than 60 per cent from June 2014 had sent prices down to their lowest levels since the 2008 financial crisis.
That tumble had been precipitated by a sudden realisation that economies – and oil demand – were slowing while extra production in the United States continued to pour into the market.
The International Energy Agency, the consumer countries’ energy watchdog, took an apologetic tone in its latest outlook last month about the limitations of the tools at its disposal to explain the market’s rebound.
“Statistics … have a poor track record of capturing rapid market changes, [so] current markets could thus be tighter than reflected in recent data,” said the agency.
The IEA said that probably three factors had lifted demand for oil in the first half of the year: some recovery in the world economy, the fact that lower oil prices encouraged more demand, and a colder winter this year in several large oil-consuming countries.
“Demand growth was particularly robust in the US, where consumers are more directly exposed to the plunge in dollar-denominated oil prices than those in countries with higher retail oil taxes or whose currency has been weakening versus the dollar,” the IEA noted.
But the market has some dark clouds hanging over it. Although demand grew more than expected – an estimated 1.7 million barrels per day in the first quarter – supply grew even more at 3.1 million bpd during that period.
The extra barrels went into storage while shortages of some oil products – such as petrol and heating oil – accounted for the relatively strong oil prices.
The question facing the market now, of course, is what happens next? Will demand rise sufficiently to catch up to supply and mop up the excess? Will slowing oil output growth in the US and elsewhere bring the market into balance?
One of the key variables will be what China does in terms of its huge amount of new oil storage capacity, according to Amrita Sen, an oil analyst at Energy Aspects, a research and consultancy firm based in London.
The momentum for rising oil prices is capped by high inventory levels, says Ms Sen, as well as macroeconomic risks “including the collapse of the Chinese stock market, a potential Greek euro zone exit and a strong dollar”.
But Chinese buying for its strategic petroleum reserve later this year could swing the market. Ms Sen points out that a new Huangdao facility that debuted last month, together with three more such strategic oil storage centres scheduled to be completed within the next year or so, will add more than 100 million barrels of Chinese storage capacity.
The fact that state-controlled PetroChina last month bought nearly all of the available Oman and Abu Dhabi Upper Zakum crude cargoes available for delivery next month indicates that China remains keen to fill these new facilities.
“Depending on the level of Chinese buying, a large part of the current oversupply in the market should be dealt with by moving it into Chinese non-commercial storage,” she says. “The more the Chinese buy, the faster the global crude glut will clear.”
Supply is the other shoe that must drop. US supply is expected to continue to grow but at a much slower rate, while output in the UK North Sea, China, Mexico and some other Latin American producers will probably decline.
The demand on Opec producers for crude could rise next year by 900,000 bpd to average 30.1 million bpd, a report from the group said on Monday. And one of the key questions for the market is the extent to which Iraq and Iran can add supply.
Analysts are also trying to map out the likely scenario, especially for Iran, assuming sanctions related to its nuclear programme will be eased. Ms Sen’s colleague at Energy Aspects, Richard Mallinson, just completed a detailed field-by-field study of Iran’s oilfields, which have been held back not only by sanctions but by years of under-investment.
He agrees with a growing body of market watchers that Iran’s ability to raise its oil exports will be limited and slow.
“Production might rise by at most 400,000 bpd to 3.25 million bpd [from 2.85 million bpd now] by the second half of next year”, he says, assuming the country’s three largest fields, which account for the bulk of output, can be boosted by new projects and that Iran is successful with enhanced oil recovery techniques.
However, there are risks across the board and the likelihood is that the increase will be smaller, he says.
Meaningful increases in production will require billions of dollars of foreign investment and expertise and that will take years to bear fruit, he reckons.
amcauley@thenational.ae
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