 "Oil prices can dip another 50% from current levels: Vandana Hari")
Crude oil prices hit a seven-year low last week after the Organization of the Petroleum Exporting Countries (Opec) kept production levels unchanged. Singapore-based Vandana Hari, Asia editorial director at Platts, global aggregator of price assessments for the energy and petrochemicals markets, among others, shares her assessment with Puneet Wadhwa. Edited excerpts:
What is your interpretation of Opec’s decision to keep output unchanged?
Opec needs to re-invent itself. The path it embarked upon with its decision in November 2014 to let market forces restore the supply-demand balance and find the “equilibrium price” has no easy U-turns. There are a few vocal members within the organisation, led by Venezuela, that have been urging it to reduce output and reclaim its traditional role of swing producer. However, Saudi Arabia, which wields the most influence on the final decision, and its Arab neighbours have dug in their heels to defend market share, rather than prices.
How long can it resist a production cut?
The chances of Opec capitulating in the coming months are next to nil, in my mind. Also, with the group having done away with individual member country quotas since 2012, I can’t see how they could return to the system in the current environment of mistrust and deep philosophical divisions within the ranks. It has also made clear it will only contemplate a cut if other major non-Opec producers such as Russia do the same. That also seems a very low probability.
Your outlook on prices?
The sell-off could have been somewhat overdone. Though Opec might have disappointed some of the market participants, the outcome was largely anticipated and the meeting has not altered the demand–supply fundamentals. Crude (oil prices) might be adrift and move mostly sideways for some time to come, susceptible to another leg-down when the incremental Iranian barrels start flowing into the market as Western sanctions against the country are lifted.
Oil prices have dropped nearly 50 per cent in 18 months. Could the next 12–18 months shave another 50 per cent from the current levels?
That’s a possibility, though we could see a tipping point well before that. Which means supply starts responding and the rebalancing process begins.
The key risks?
In terms of a reversal in direction, IS (the Islamic State insurgent army) and the broader West Asia conflict continue to lurk in the shadows as a geopolitical threat to oil supplies from the region. But, the market appears to be assigning a very low probability to that. The longer we see IS in operation without impacting oil flows from Iraq or any other country in the region, the more it reinforces market opinion that oil supplies are unlikely to be jeopardised. The other factor in the balance is US shale (oil) and how tight oil (prices) responds to sustained prices in the low-$40s or below.
Do the prices factor in the possibility of slowing global growth?
Global oil demand growth does hang in the balance and the recent renewed softness in crude (prices) likely factors in growing pessimism over global economic growth and oil consumption, in addition to expectations of a supply glut. We have seen a healthy year-on-year rise in oil demand this year from China and India but it has been lacklustre in the rest of the world.
With Chinese economic growth still cooling, and given that a lot of refined products have piled up in storage there, there is a question mark on the rise in consumption next year.
Even if Indian demand continues to be healthy, it is but a third of Chinese consumption and not a significant contribution on a global scale. On balance, demand could have reached its elastic point. The ‘tailwinds’ of low oil prices can only go so far in buoying the emerging market economies, which face challenges on several other fronts.
Are the oil markets factoring in a US Fed rate increase?
A stronger dollar puts downward pressure on oil. For now, though, a modest US Fed rate rise seems to have been already factored into the currency markets and, by extension, the oil markets.
What is the outlook for gas prices over the next 12 months?
The outlook in the US remains poor. Recently, the US Energy Information Administration forecast that the Henry Hub natural gas spot price would average $2.47/mBtu this winter through to March 2016, compared with $3.35/mBtu last winter. US gas production has proven remarkably resilient to low prices over the past few years, in part because a lot of it is produced in association with shale oil. With the latter now in decline, US gas production might not prove so resilient in future. Yet, like the oil market, gas inventories remain high and producers are likely to remain focused on maintaining output to preserve cash flow, even as profits become paper-thin.
Reports suggest Opec's production level is now less relevant to controlling of oil prices, as output from outside the cartel would fill any cuts it made. Do you agree?
Given that Opec has abdicated its role as a swing producer, prices are now truly at the mercy of market forces, and how supply and demand respond to price signals. Yes, an Opec cut could be ineffective, as any resultant rise in prices might bring back some or all of the production which has been shut over the past months as it became uneconomical.
What is your interpretation of Opec’s decision to keep output unchanged?
Opec needs to re-invent itself. The path it embarked upon with its decision in November 2014 to let market forces restore the supply-demand balance and find the “equilibrium price” has no easy U-turns. There are a few vocal members within the organisation, led by Venezuela, that have been urging it to reduce output and reclaim its traditional role of swing producer. However, Saudi Arabia, which wields the most influence on the final decision, and its Arab neighbours have dug in their heels to defend market share, rather than prices.
How long can it resist a production cut?
The chances of Opec capitulating in the coming months are next to nil, in my mind. Also, with the group having done away with individual member country quotas since 2012, I can’t see how they could return to the system in the current environment of mistrust and deep philosophical divisions within the ranks. It has also made clear it will only contemplate a cut if other major non-Opec producers such as Russia do the same. That also seems a very low probability.
Your outlook on prices?
The sell-off could have been somewhat overdone. Though Opec might have disappointed some of the market participants, the outcome was largely anticipated and the meeting has not altered the demand–supply fundamentals. Crude (oil prices) might be adrift and move mostly sideways for some time to come, susceptible to another leg-down when the incremental Iranian barrels start flowing into the market as Western sanctions against the country are lifted.
Oil prices have dropped nearly 50 per cent in 18 months. Could the next 12–18 months shave another 50 per cent from the current levels?
That’s a possibility, though we could see a tipping point well before that. Which means supply starts responding and the rebalancing process begins.
The key risks?
In terms of a reversal in direction, IS (the Islamic State insurgent army) and the broader West Asia conflict continue to lurk in the shadows as a geopolitical threat to oil supplies from the region. But, the market appears to be assigning a very low probability to that. The longer we see IS in operation without impacting oil flows from Iraq or any other country in the region, the more it reinforces market opinion that oil supplies are unlikely to be jeopardised. The other factor in the balance is US shale (oil) and how tight oil (prices) responds to sustained prices in the low-$40s or below.
Do the prices factor in the possibility of slowing global growth?
Global oil demand growth does hang in the balance and the recent renewed softness in crude (prices) likely factors in growing pessimism over global economic growth and oil consumption, in addition to expectations of a supply glut. We have seen a healthy year-on-year rise in oil demand this year from China and India but it has been lacklustre in the rest of the world.
With Chinese economic growth still cooling, and given that a lot of refined products have piled up in storage there, there is a question mark on the rise in consumption next year.
Even if Indian demand continues to be healthy, it is but a third of Chinese consumption and not a significant contribution on a global scale. On balance, demand could have reached its elastic point. The ‘tailwinds’ of low oil prices can only go so far in buoying the emerging market economies, which face challenges on several other fronts.
Are the oil markets factoring in a US Fed rate increase?
A stronger dollar puts downward pressure on oil. For now, though, a modest US Fed rate rise seems to have been already factored into the currency markets and, by extension, the oil markets.
What is the outlook for gas prices over the next 12 months?
The outlook in the US remains poor. Recently, the US Energy Information Administration forecast that the Henry Hub natural gas spot price would average $2.47/mBtu this winter through to March 2016, compared with $3.35/mBtu last winter. US gas production has proven remarkably resilient to low prices over the past few years, in part because a lot of it is produced in association with shale oil. With the latter now in decline, US gas production might not prove so resilient in future. Yet, like the oil market, gas inventories remain high and producers are likely to remain focused on maintaining output to preserve cash flow, even as profits become paper-thin.
Reports suggest Opec's production level is now less relevant to controlling of oil prices, as output from outside the cartel would fill any cuts it made. Do you agree?
Given that Opec has abdicated its role as a swing producer, prices are now truly at the mercy of market forces, and how supply and demand respond to price signals. Yes, an Opec cut could be ineffective, as any resultant rise in prices might bring back some or all of the production which has been shut over the past months as it became uneconomical.