 "Oil prices could remain in range of $50-70 a barrel: Vandana Hari")
Brent crude oil prices have rallied nearly 40 per cent from their low in December to around $70 a barrel, the highest level in calendar year 2015. Vandana Hari, Asia editorial director, Platts, tells Puneet Wadhwa that this upmove could have driven speculators. Edited excerpts:
After hitting 2015 highs, crude oil prices have cooled off since. What factors led to this rise and where do you see oil prices in the next 6–12 months from now?
Looks like the oil markets are not only showing disconnect between the physical and the financial perspectives from time to time, but also a divergence between the short–term view and the long –term realities. It seems to have been a speculative rally, which was characterised by a spurt in speculative net long positions on the NYMEX and Brent crude futures, starting in April. There were three main factors: expectations of the US shale boom fizzling out soon, given the relentless drop in oil rig counts for nearly five months now; a geopolitical risk premium on account of escalation of tensions in Yemen; and the softening dollar. Only the last of these factors is actually grounded in reality.
Analysts and market watchers indicate a lot more US tight oil could come into production if NYMEX crude is sustained around $65 a barrel. That would be from more aggressive drilling — we’ve already seen a levelling off in the decline in US oil rig count last week, possibly supported by the recent firmer prices — as well as incremental barrels from the drilled-but-uncompleted wells, which can be turned on fairly quickly.
This suggests that unless global oil demand growth catches up with the estimated 1.5 million barrels per day (b/d) to 2.0 million b/d of oversupply, production will remain the only factor for capable of re-balancing the market, and we could be stuck in the $50 - $70/barrel range for WTI and Brent, with occasional, albeit short-lived breaks on either side.
Do the current inventory levels/oil stockpiles justify this rally in oil prices? Do you see a pick-up in demand anytime soon?
US production may be down about 50,000 b/d from the peak of 9.42 million b/d recorded in March, but it is still more than a million barrels a day higher compared with a year ago. The developments in Yemen and the recent reports of rockets fired across the Saudi border are worrying, no doubt, but the problem has had no impact on Saudi crude supplies or oil shipments. So, it's not a surprise that the rally began losing steam in the second half of the week.
As we have seen in previous price upticks this year, speculation gets a reality check from fundamentals, which remain bearish, and is not enough to support a lift-off in oil prices. The market is oversupplied, stocks are plentiful, and there are no signs of demand growth strong enough to start plugging the gap caused by the booming production. The only supportive factor that I see for now is a weaker dollar, which makes oil costlier.
Not even from China?
The supply-demand fundamentals haven’t changed – the market is still oversupplied and demand is ho-hum. China, the main engine of commodities demand growth for a decade, is slowing down. Yes, there may be more fiscal stimulus coming from Beijing as a result, but I doubt that will kick oil demand growth into the red hot territory. Yes, Chinese car sales might grow at eight per cent this year, but even double-digit gasoline sales growth cannot prop up Chinese oil consumption.
How much of fear premium are the market participants attaching to the oil prices, given the developments in West Asia? Have the fears been overdone?
The fears might indeed have been overdone, given that Yemen itself is a very small producer and an even small exporter – it exported around 47,000 b/d of crude last year according to official figures – and the Houthi insurgency has neither impacted Saudi production and exports, nor shipping through the strait of Bab al-Mandab, which saw flows of around 4.7 million b/d of crude and refined products last year, according to US Energy Information Administration data.
What are the factors that can either take the oil prices sharply up or down? What is the probability you attach to these events materialising and how soon?
A decision by Opec to cut production would spark a rally, even more so if it happens to be in conjunction with major non-Opec producers. But that possibility seems remote to me. The Houthi uprising in Yemen, ISIS incursion in Iraq, and the continuing Syrian conflict, combined with other long-simmering religious and sectarian tensions in the Middle East, could spark off a regional war in the worst-case scenario, which could have major repercussions on oil supplies.
The market, however, is not pricing in the worst-case scenario as a high probability. Smaller production outages, like in Libya and the recent one in Angola, are more than easily absorbed by the oversupplied market.
Do you think that the oil market rally could partly be driven by the rising dollar and the fear that the US Federal Reserve (US Fed) could hike rates in the latter half of 2015?
The dollar's volatility, spurred by continuing uncertainty and speculation over the US Fed rate hike timing, has certainly become a factor buffeting oil prices. The drop in the US dollar index from a recent high of 99+ on April 13 to a trough of around 94 at the close of May 6, fed into last week's price rally.
What are your expectations from the Opec meet on June 5?
Opec is expected to stay the course at its June 5 meeting in Vienna. Though the proposal for a cut in production, in cooperation with non-Opec producers, has been kept alive since the controversial decision of last November, and has again surfaced in comments by some of the Opec ministers in recent days, it's easier said than done.
History doesn't offer us examples of a successful Opec and non-Opec cooperation to reduce supplies. I can't think of a situation in which US producers would come to the table for such an agreement, and without them, any Opec cut, to my mind, would be capitulating to shale even before the industry has been completely stress-tested.
For Saudi Arabia and other Opec producers with some staying power, it seems to be a battle for market share. If anything, the producers’ organisation has cranked up its output – reaching 30.93 million b/d in April, the highest levels since November 2012.
After hitting 2015 highs, crude oil prices have cooled off since. What factors led to this rise and where do you see oil prices in the next 6–12 months from now?
Looks like the oil markets are not only showing disconnect between the physical and the financial perspectives from time to time, but also a divergence between the short–term view and the long –term realities. It seems to have been a speculative rally, which was characterised by a spurt in speculative net long positions on the NYMEX and Brent crude futures, starting in April. There were three main factors: expectations of the US shale boom fizzling out soon, given the relentless drop in oil rig counts for nearly five months now; a geopolitical risk premium on account of escalation of tensions in Yemen; and the softening dollar. Only the last of these factors is actually grounded in reality.
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In terms of specific price points or a range, do you see oil prices holding on to any particular band for the next 12 months?
Analysts and market watchers indicate a lot more US tight oil could come into production if NYMEX crude is sustained around $65 a barrel. That would be from more aggressive drilling — we’ve already seen a levelling off in the decline in US oil rig count last week, possibly supported by the recent firmer prices — as well as incremental barrels from the drilled-but-uncompleted wells, which can be turned on fairly quickly.
This suggests that unless global oil demand growth catches up with the estimated 1.5 million barrels per day (b/d) to 2.0 million b/d of oversupply, production will remain the only factor for capable of re-balancing the market, and we could be stuck in the $50 - $70/barrel range for WTI and Brent, with occasional, albeit short-lived breaks on either side.
Do the current inventory levels/oil stockpiles justify this rally in oil prices? Do you see a pick-up in demand anytime soon?
US production may be down about 50,000 b/d from the peak of 9.42 million b/d recorded in March, but it is still more than a million barrels a day higher compared with a year ago. The developments in Yemen and the recent reports of rockets fired across the Saudi border are worrying, no doubt, but the problem has had no impact on Saudi crude supplies or oil shipments. So, it's not a surprise that the rally began losing steam in the second half of the week.
As we have seen in previous price upticks this year, speculation gets a reality check from fundamentals, which remain bearish, and is not enough to support a lift-off in oil prices. The market is oversupplied, stocks are plentiful, and there are no signs of demand growth strong enough to start plugging the gap caused by the booming production. The only supportive factor that I see for now is a weaker dollar, which makes oil costlier.
Not even from China?
The supply-demand fundamentals haven’t changed – the market is still oversupplied and demand is ho-hum. China, the main engine of commodities demand growth for a decade, is slowing down. Yes, there may be more fiscal stimulus coming from Beijing as a result, but I doubt that will kick oil demand growth into the red hot territory. Yes, Chinese car sales might grow at eight per cent this year, but even double-digit gasoline sales growth cannot prop up Chinese oil consumption.
How much of fear premium are the market participants attaching to the oil prices, given the developments in West Asia? Have the fears been overdone?
The fears might indeed have been overdone, given that Yemen itself is a very small producer and an even small exporter – it exported around 47,000 b/d of crude last year according to official figures – and the Houthi insurgency has neither impacted Saudi production and exports, nor shipping through the strait of Bab al-Mandab, which saw flows of around 4.7 million b/d of crude and refined products last year, according to US Energy Information Administration data.
What are the factors that can either take the oil prices sharply up or down? What is the probability you attach to these events materialising and how soon?
A decision by Opec to cut production would spark a rally, even more so if it happens to be in conjunction with major non-Opec producers. But that possibility seems remote to me. The Houthi uprising in Yemen, ISIS incursion in Iraq, and the continuing Syrian conflict, combined with other long-simmering religious and sectarian tensions in the Middle East, could spark off a regional war in the worst-case scenario, which could have major repercussions on oil supplies.
The market, however, is not pricing in the worst-case scenario as a high probability. Smaller production outages, like in Libya and the recent one in Angola, are more than easily absorbed by the oversupplied market.
Do you think that the oil market rally could partly be driven by the rising dollar and the fear that the US Federal Reserve (US Fed) could hike rates in the latter half of 2015?
The dollar's volatility, spurred by continuing uncertainty and speculation over the US Fed rate hike timing, has certainly become a factor buffeting oil prices. The drop in the US dollar index from a recent high of 99+ on April 13 to a trough of around 94 at the close of May 6, fed into last week's price rally.
What are your expectations from the Opec meet on June 5?
Opec is expected to stay the course at its June 5 meeting in Vienna. Though the proposal for a cut in production, in cooperation with non-Opec producers, has been kept alive since the controversial decision of last November, and has again surfaced in comments by some of the Opec ministers in recent days, it's easier said than done.
History doesn't offer us examples of a successful Opec and non-Opec cooperation to reduce supplies. I can't think of a situation in which US producers would come to the table for such an agreement, and without them, any Opec cut, to my mind, would be capitulating to shale even before the industry has been completely stress-tested.
For Saudi Arabia and other Opec producers with some staying power, it seems to be a battle for market share. If anything, the producers’ organisation has cranked up its output – reaching 30.93 million b/d in April, the highest levels since November 2012.