Volatile oil prices are here to stay
Tuesday, 08 May 2012 | 11:00
Rarely has the world economy been in such an uncertain condition with oil supply plentiful and at the same time oil prices the level they are.
The price of the Opec basket of crude at the beginning of February was $110.61 (Dh406) a barrel but persistently rose to $124.64 by March 13, though with some volatility a feature that has been clear and present in recent years and is not likely to disappear any-time soon.
However, the perceived weakness in the world economy and the fears that Europe is heading into a recession, especially with the situation in Spain with respect to sovereign debt, the resignation of the Dutch government as it could not get backing for its austerity plans and finally the slowdown in China's growth all contributed to a softening of prices. The above were also coupled by rising Opec production, which was at an average of 31.31 million barrels a day in March and continued its rise to 31.75 mbd in April, the highest since 2008 as extra crude from Iraq, Saudi Arabia and Libya more than compensated for the lower Iranian supply and some outages in non-Opec.
Therefore, prices for the Opec basket fell to $115.5 by April 23 and rose again to $117.2 by the end of the month. The average price for April was $118.18 compared with $122.93 in March but the year to date average is $117.64 compared with the 2011 average of $107.46.
It is difficult to tell where prices are heading as even the small recovery towards the end of April is slightly faltering now and the market is still in the low demand season of the second quarter where the IEA is estimating a lower demand by some 1.3 million bpd compared with the first quarter. Some analysts believe that the geopolitical situation is holding prices and is likely to make them rise than not. The tension with Iran is still there in spite of the latest talks in Istanbul and the scheduled talks in Baghdad between Iran and the permanent members of the Security Council plus Germany.
The situation in Sudan is volatile and does not appear to be heading to a resolution where some 400,000 bpd are held from the market by the closure of the pipeline between Sudan and the newly independent South Sudan. The same thing can be said about the situation in Syria where some 300,000 bpd are trapped by the violence there and the imposed sanctions on the country. Even Libya's oil production recovery is threatened by the uncertain political situation there.
Iran is still threatening to close the Strait of Hormuz and the Americans are massing air power in the region. Though the rhetoric is less now, some unintentional accidents where two sides are facing each other can change the situation. Hormuz is the most important gateway to oil exports where more than 17 million bpd of crude and products and 77 million tonnes a year of natural gas pass.
The alternative routes are limited and even a heavy draw of stocks in consuming countries will not prevent prices from rising to unprecedented levels.
Even without the closure of Hormuz, the International Monetary Fund said recently "in case of supply disruptions, oil prices could increase by $20 to $30 a barrel. A cut in Iranian exports could be exacerbated by below average oil stocks in many countries."
The average demand for Opec crude oil in 2012 is now estimated by Opec and IEA at 30 and 30.1 million bpd respectively which is slightly less than what it was in 2011. However these numbers may be revised upward due to some recent announcements about better economic growth expectations and lower unemployment rates in the US, especially if the driving season turns out better than expected, even though gasoline prices are at high levels.
The sanctions on Iran have not yet taken hold completely in Europe where 400,000 bpd are likely to be affected. But no one has a clear idea how much China and India will still import from Iran under the circumstances. Some analysts estimate that Iranian exports may be reduced by 800,000 to one million bpd in the second half of the year as the talks with Iran are unlikely to be conclusive soon.
Geopolitics is unlikely to change dramatically soon and oil prices will continue to be affected by it. As J.P. Morgan recently said, "The reality is that any short-term weakness in energy prices is likely to prove limited." The question is who will supply the shortfall in Iranian exports? Iraq and Saudi Arabia may do so but this remains to be seen.
Source: Gulf News
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