What is common between the production and marketing approaches of the 12-member Organization of the Petroleum Exporting Countries (Opec) and the world's three largest producers of iron ore - Vale, BHP Billiton and Rio Tinto? The fall in prices of crude oil from $115 a barrel in June 2014 to $64 now and of iron ore from $205 a tonne to $62.5 have not proved enough disincentive for leading producers of the two most globally traded commodities to apply a production brake.
Opec and the ore triumvirate do not see merit in restricting production at lowest cost enterprises, which will allow high-cost producers to stay in business. As big miners remain engaged in commissioning large new capacity and others that cannot abandon projects nearing completion, the seaborne ore glut could rise to 260 million tonnes (mt) by the end of next year. The surplus is likely to send prices down to $40 a tonne by 2017, end of the road for high-cost producers.
Oil prices in January collapsed to $45 a barrel. Saudi Arabia propelling Opec to keep the tap on is soon to lead the world to experience the longest fuel supply surplus since at least 1985. For the third month running in May, Opec pumped one million barrels a day (mbad) above its production quota and 1.8 mbad in excess of the daily demand forecast for its own oil.
Low oil prices, which made the task of managing the country's finances easier for Arun Jaitley (India's oil import bill are set to shrink 21.7 per cent to $88 billion in 2015-16) are proving hurtful for Opec constituents such as Nigeria and Venezuela. For them, income from oil exports is the principal source of state revenue. Saudi Arabia is an efficient oil producer. But at prevailing prices, the world's biggest oil producer is hugely stretched to take care of social security.
Even then, through persuasion and cajoling of doubtful Opec members, Riyadh made sure that production would be sustained at the current level irrespective of energy prices. Largely scripted by Riyadh, Opec's strategy is to shore up its market share and not concede ground to non-Opec producers, particularly the US, at the forefront of a shale revolution.
Supply will get a boost on Iran reaching an agreement with world powers on the country's vexed nuclear programme. Iranian oil exports could take a leap of one mbad within seven months of sanctions being removed. Also, expect Libya to lift oil production in the months ahead.
Like Opec, Russia is dismissive of suggestions to restrict production to prop up prices. In fact, its production is now running at a post-Soviet Union high of close to 11 mbad. For the current year, the International Energy Agency (IEA) has estimated demand growth of 1.4 mbad, down from 1.7 mbad in the first quarter on assumption of a return to normal weather conditions and a partial recovery in prices. Prices staying in a band of $60 and $65 a barrel has led to mothballing of a number of projects at a contemplation or about-to-be-implemented stage. The oil outlook is to turn grimmer in case Greece is not able to pull itself out of the abyss.
In an interview with Financial Times, BP chief executive Bob Dudley said: "It is too early to judge if Opec's policy has been a success because it would take several years to play out... Globally in the industry, $130 billion of projects have been delayed, deferred or cancelled. That's going to have an impact down the road."
Meantime, in spite of high rates of production by Opec and Russia, May global oil supplies were down by 155,000 barrels a day to 96 mbad, thanks to output fall in non-Opec centres.
Even then, May supply was three mbd more than a year ago. This explains why demand improvement continues to be overshadowed by a surge in supply. However, as Opec remains bent on squeezing high-cost producers, particularly extractors of oil from shale rock and other hard-to-access places, expect non-Opec supply to fall further.
US shale drillers' debts climbing to $235 billion in the wake of the 43 per cent decline in oil prices and a falling number of rigs in deployment must be bringing joy to Opec.
Opec and the ore triumvirate do not see merit in restricting production at lowest cost enterprises, which will allow high-cost producers to stay in business. As big miners remain engaged in commissioning large new capacity and others that cannot abandon projects nearing completion, the seaborne ore glut could rise to 260 million tonnes (mt) by the end of next year. The surplus is likely to send prices down to $40 a tonne by 2017, end of the road for high-cost producers.
| OIL’S NOT WELL |
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Oil prices in January collapsed to $45 a barrel. Saudi Arabia propelling Opec to keep the tap on is soon to lead the world to experience the longest fuel supply surplus since at least 1985. For the third month running in May, Opec pumped one million barrels a day (mbad) above its production quota and 1.8 mbad in excess of the daily demand forecast for its own oil.
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Thanks to Saudi Arabia and other Gulf states raising production month on month, Opec's output in May rose by 50,000 barrels a day to 31.3 mbad. Such high levels of output when demand is not rising fast enough has a negative bearing on oil prices.
Low oil prices, which made the task of managing the country's finances easier for Arun Jaitley (India's oil import bill are set to shrink 21.7 per cent to $88 billion in 2015-16) are proving hurtful for Opec constituents such as Nigeria and Venezuela. For them, income from oil exports is the principal source of state revenue. Saudi Arabia is an efficient oil producer. But at prevailing prices, the world's biggest oil producer is hugely stretched to take care of social security.
Even then, through persuasion and cajoling of doubtful Opec members, Riyadh made sure that production would be sustained at the current level irrespective of energy prices. Largely scripted by Riyadh, Opec's strategy is to shore up its market share and not concede ground to non-Opec producers, particularly the US, at the forefront of a shale revolution.
Supply will get a boost on Iran reaching an agreement with world powers on the country's vexed nuclear programme. Iranian oil exports could take a leap of one mbad within seven months of sanctions being removed. Also, expect Libya to lift oil production in the months ahead.
Like Opec, Russia is dismissive of suggestions to restrict production to prop up prices. In fact, its production is now running at a post-Soviet Union high of close to 11 mbad. For the current year, the International Energy Agency (IEA) has estimated demand growth of 1.4 mbad, down from 1.7 mbad in the first quarter on assumption of a return to normal weather conditions and a partial recovery in prices. Prices staying in a band of $60 and $65 a barrel has led to mothballing of a number of projects at a contemplation or about-to-be-implemented stage. The oil outlook is to turn grimmer in case Greece is not able to pull itself out of the abyss.
In an interview with Financial Times, BP chief executive Bob Dudley said: "It is too early to judge if Opec's policy has been a success because it would take several years to play out... Globally in the industry, $130 billion of projects have been delayed, deferred or cancelled. That's going to have an impact down the road."
Meantime, in spite of high rates of production by Opec and Russia, May global oil supplies were down by 155,000 barrels a day to 96 mbad, thanks to output fall in non-Opec centres.
Even then, May supply was three mbd more than a year ago. This explains why demand improvement continues to be overshadowed by a surge in supply. However, as Opec remains bent on squeezing high-cost producers, particularly extractors of oil from shale rock and other hard-to-access places, expect non-Opec supply to fall further.
US shale drillers' debts climbing to $235 billion in the wake of the 43 per cent decline in oil prices and a falling number of rigs in deployment must be bringing joy to Opec.