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Neither $10 Nor $100: Oil Futures Destined For The Modest Medium-Term Middle

There has been plenty of talk over the past few weeks of the oil price either heading higher over the medium-term on the back of a supply correction or heading lower in the wake of the rise of electric vehicles. Both exaggerations miss the point – the oil industry is not facing some sort of a seminal moment, rather more of a once-in-a-generation readjustment with physical, geopolitical and economic connotations.


Of course, all three are intertwined in this crude world. For starters, the geopolitical premium, used as a pretext to bump up oil futures – after the Global Financial Crisis and until the summer of 2014 when a supply glut drowned it out – is no longer what it used to be.


Given the rise of its domestic production – tipped to cap 10 million barrels per day (bpd) in 2018 – the U.S.’ foreign policy approach has completely turned on its head. Not only is there no pressing need for Washington to overtly safeguard external sources of oil, the country has actually turned into an exporter, actively targeting major Asian economies such as India. Such a move has provided these economies, hitherto heavily reliant on OPEC crude, with an importation alternative, albeit one that’s presently a pretty modest one.



Storage tanks at an Indian Oil Refinery at Vadinar village, near Jamnagar, some 380 kms. from Ahmedabad. (Photo: Sam Panthaky/AFP/Getty Images)


Switching tack to the physical extraction of crude, between the summer of 2014 and 2016 oil cartel OPEC’s approach – colored by former Saudi oil minister Ali Al-Naimi – included letting the market take its own course by keeping the taps open and pumping as much crude as possible to take on the marginal barrel in an oversupplied market.


End result was a predictable slump in oil prices. However, under Al-Naimi’s successor – Khalid Al-Falih – OPEC not only returned to cutting protection in a bid to support prices, but also brought the Russians and nine other non-OPEC producers along for the ride to announce combined cuts of 1.8 million bpd late in 2016.


On paper, such an agreement currently stands with varying degrees of compliance. According to S&P Global Platts, OPEC compliance from January to September 2017 came in at 106% of its pledged 1.3 million bpd cut. The data aggregator’s latest survey suggests OPEC’s output in September rose marginally by 10,000 bpd, as production increases in Libya and Iraq were largely offset by declines in Venezuela and Angola.


OPEC’s 14 members saw their collective September output rise to 32.66 million bpd from 32.65 million bpd in August. That is some 740,000 bpd above its declared ceiling of about 31.92 million bpd, when Equatorial Guinea, which joined in May, is added in and Indonesia, which suspended its membership in December, is subtracted.


Over the said period, the cartel has often struggled to control its members, with the International Energy Agency (IEA) singling out Algeria, Iraq and the United Arab Emirates as OPEC members who’ve often not respected their quotas. Add to it Ecuador, which has now openly said it is not fiscally in a position to cut, and Nigeria and Libya who are exempt from the cuts.


What is even more complicated is the lack of an exit strategy. How and at what point, do the OPEC and non-OPEC cuts end? The current deal, valid till March 2018, might well be rolled over for another six months, but cannot be rolled over infinitely.


Hence, the rather bizarre call by OPEC Secretary General Mohammed Sanusi Barkindo to U.S. shale players – driven by the spirit of private enterprise – to restrain production; an unthinkable development given that as recently as 2013 the cartel did not even acknowledge the threat of shale production.

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