Oil price still not ready for recovery

21 April 2015

Opec optimism unfounded while global market remains oversupplied

Despite Opec’s confidence that the green shoots of recovery are already visible for the global oil price, there remains a huge amount of uncertainty in the market that will probably make the oil producers group think twice about a quick rebound.

Crude oil has certainly rallied in April, hitting three-month highs on the back of slowing stock builds, but there is still a question mark as to whether US production will slow as quickly as expected.

Saudi Arabia’s Oil Minister Ali al-Naimi says that Saudi Aramco was pumping in excess of 10 million barrels a day (b/d) in April and would increase production if its customers requested more oil.

With prices so low, many customers are buying more crude, but there are still concerns with China’s sluggish growth forecasts, which are the lowest for six years. However, Aramco is still supplying 1 million b/d to Chinese customers.

Aramco’s continued output of 10 million b/d is proof that it is still completely committed to the strategy of maintaining market share in favour of higher oil prices and that fellow Opec members have to comply or risk losing out to others.

Al-Naimi has said that Saudi Arabia would only ever consider cutting production if a “fair and credible mechanism” was introduced that all major oil producers agreed to adhere to. However, in today’s fractured oil market that is an extremely unlikely scenario.

Riyadh is correct in stating that it is no solely responsible for the oil price being low and protecting its own market share, while highly unpopular, is an effective means of riding out the current lull in prices.

Looking forward, US production is likely to slow, especially at fields where lighter grades of crude are commonplace. US refiners prefer heavier grades of oil to maximise product yields, which means that drilling activity is already slowing at many fields, according to a recent report by Barclays Commodities Research.   

While lighter oil production is falling, much of it is being replaced by Canadian heavy oil which is set to increase by 200,000 b/d in 2015.

Despite much of the focus being on the incredible success of North American unconventional oil, Opec still remains the dominant player in the global market.

Aramco could ramp up to 11 million barrels a day if it believed the market could take the extra, while Iran’s rapprochement could see 35 million barrels of stored oil entering an already oversupplied market. Within a few months, this would be followed by an extra 1.5 million b/d of Iranian crude as Tehran ramps up production to pre-sanction levels.

Geopolitical factors could still play a role, especially if the situation in Yemen is inflamed. However, in a few months the current price for Brent crude of circa-$63 a barrel mean looks very attractive to all the world’s major producers.

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