OPEC: Can it ride out the storm?

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AFP

by AFP15 Jul 20171

Istanbul (AFP) – For cartel OPEC — created in 1960 with the aim of supporting a sustainable price on the oil market — it is in some ways a perfect storm.

Stocks have surged thanks to the rapid emergence of oil from US shale deposits. And due to the abundant supply, the price of oil now stands at currently less than $50 per barrel, around a third of the level of 10 years ago, when it topped a high of $147.

This has been terrible news for the leading members of the group — including Iran, Saudi Arabia and Venezuela — who have seen holes blown in their hydrocarbon-dependent budgets.

Meanwhile, on a longer term horizon, the focus has switched from when “peak oil” will be reached — the moment oil extraction starts to decline due to dwindling resources — to when demand itself could fall.

So the mood as top energy bosses and ministers met at the World Petroleum Congress in Istanbul this week ranged from pensive to sombre.

“It’s hard to come to terms with the fact that this is a different oil industry,” said Daniel Yergin, the vice chairman of IHS Markit, who wrote the acclaimed book “The Prize” on the history of the global oil industry.

“The US will later this year or early next year reach the highest production in its history,” he told the congress.

– ‘Prices are stuck’ –

OPEC has no control over the revolution caused by the production of shale oil in the United States, which is not a member of the cartel.

In a bid to push prices up, OPEC and key non-cartel members — including Russia, but not the United States — agreed coordinated output cuts in December to push up prices.

The cuts were envisaged for six months and extended for another three. But so far, they have had hardly any effect — with oil prices still hovering at 45 dollars a barrel.

The oil industry was confronted by market forces “which are strong, stubborn and as a result we are here today with prices that are stuck… where they were six months ago,” said International Energy Agency (IEA) director Fatih Birol.

“It will be a very, very difficult six months for the oil industry, a case of riding out the storm,” he said.

OPEC Secretary General Mohammed Barkindo admitted there had been “high expectations” that markets would respond to the deal in 2017, but so far these had not been realised.

The failure of the deal to make a difference is particularly irksome for OPEC as compliance — the implementation of the pledges — has been over 100 percent.

Undeterred, OPEC and the non-cartel members party to the deal will have a committee meeting in Saint Petersburg on July 24 to review its effects.

Meanwhile, an effort to tighten coordination, Barkindo revealed that OPEC had held “very useful preliminary meetings” with US shale producers.

OPEC’s own influence has also slipped in recent years and it now counts for just a third of global oil supplies compared with 40 percent a decade ago.

As well as the US shale revolution, the greater importance of additional non-OPEC market players — including Brazil and Mexico — is also being felt, according to Sarah Emerson, head of the US-based Energy Security Analysis.

– ‘Long and complex’ –

Meanwhile, rapid global changes could also hit demand for oil in the long term, especially with the expected growth in electric cars.

“At what point demand stops growing is very much linked to the automobile,” said Yergin.

“We are seeing now a convergence of a whole lot of technology which will change the nature of what vehicles are,” he said, pointing also to the growth in ride-hailing apps.

But participants in the congress emphasised that the growth in electric cars was starting from a very low base and petrol would likely still be needed in trucks and planes for years to come.

Renewable energy is also seeing unprecedented growth — encouraged by some traditional oil majors like BP — while companies are under pressure to reduce emissions in line with the Paris Agreement on climate change.

But the chief of the Saudi Arabian energy giant Saudi Aramco, Amin Nasser, said he was optimistic that fossil fuels would remain part of the world’s energy mix for decades to come.

“The renewables still have major challenges and they do not compete with oil,” he said. “The energy transition underway will be a long, complex process,” he added.

Source: http://www.breitbart.com/news/opec-can-it-ride-out-the-storm/

The Guy Who Correctly Predicted The Fall Of Oil Prices Tells Cramer Where Crude Will Trade In 2021

Jim Cramer has interviewed countless members of the energy industry, but he says there is only one guy who correctly called the bottom for crude and predicted the trajectory for oil prices, RBN Energy President Rusty Braziel.

Unfortunately, Braziel thinks an administration under President-elect Donald Trump means the oil and gas industry is going to get things done — which could be bad news for oil prices.

"Even under the Obama administration they got a lot of things done. They got so many things done that they crushed the price of oil and gas ... now we're going to get more things done. Does that make you a little uncomfortable?" Braziel said to the "Mad Money" host on Tuesday.

Looking at the forward curve, Braziel predicted that the price of oil will be $56 a barrel by 2021.

Rusty Braziel, CEO of RBN Energy.

Braziel also speculated that the OPEC agreement to stem production by 1.2 million barrels a day was all about "optics."

"Just the fear factor was enough to take the shorts out of the market — and that's why you got the boost — but let's face it, right now we are back down under $51," Braziel said.

According to Braziel, the sweet spot for OPEC is to have crude prices between $55 and $58 a barrel. They want the extra money, but do not want to create the economics to have the U.S. increase production by 100,000 barrels a day.

"I think that the Saudis probably had a building full of consultants tell them exactly the number that they needed to pick in order to be able to boost their revenue while not unleashing the beast," Braziel said.

Read the full story here: http://www.cnbc.com/2016/12/06/the-guy-who-correctly-predicted-the-fall-of-oil-prices-tells-cramer-where-crude-will-trade-in-2021.html

The Long History of Oil Prices

Electric Cars Could Wreck Havoc on Oil Markets Within a Decade

RIP OPEC 1960 - 2016

Summary

• It's every country for itself now with OPEC.

• The catalyst that brought an end to OPEC as we know it.

• Original reason for the formation of OPEC no longer relevant.

• Why this is good for oil.

Source: CNN

For some time Saudi Arabia clearly stated it wasn't interested in attempting to influence the price of oil after the emergence of the U.S. shale industry. That resolve was tested when Venezuela attempted to leverage its relationship with Russia to press for a production freeze which would have helped push up the price of oil some. Passing the test, it revealed the fact Saudi Arabia was not only committed to the market rebalancing itself, but the reason for OPEC in the first place, was no longer relevant.

Back in 1960 when OPEC was founded, the impetus was primarily to form a cartel which could compete against large corporations, using its supply capacity to influence the price range of oil.

Now that the state-owned Saudi Aramco is preparing for an IPO of approximately 5 percent of the company, it is moving toward being one of those corporations it has been competing against for decades.

The implications for OPEC are staggering, in the sense it no longer has a real reason to exist, and with the Saudis taken steps in this direction, it's obvious it's looking out primarily for its own well being, however it may have an effect on OPEC members. Its ignoring of pleas from Venezuela confirms that's what we'll see going forward, as it struggles for its own survival in the midst of increased competition from U.S. shale producers, which has resulted in the price of oil plummeting and the revenue generated for Saudi Arabia shrinking.

OPEC grew in numbers and influence as more production was nationalized and companies owned by the states were created to produce oil and gas. The cartel was able to keep the price of oil in a desired range by setting quotas for each member, which helped keep the industry profitable. With the emergence of the powerhouse U.S. shale industry, that policy and strategy was no longer relevant or effective as a tool.

Even if Saudi Arabia wanted to keep the old methods in place, shale supply no longer allows it to. It has accepted that, and is taking steps to compete in an oil industry that has been totally disrupted from a player that will become the market leader within a few years.

Catalyst that brought down OPEC

Let me be clear on one thing: it doesn't matter whether or not OPEC as a legal entity remains in place - it no longer has a reason for existence. It is dead, and 2016 will be referred back to by historians as the end of the cartel's purpose for being.

What brought it down was the explosion of the U.S. shale industry, which quickly brought the U.S. oil industry into a top three market leader. It generated almost as much oil supply as Russia and Saudi Arabia, and will exceed them in the near future.

This matters because before U.S. shale, when OPEC decided to curtail or add to production, there were no competitors outside of Russia that was able to interfere with its decisions. Russia could have tried, but it has been producing at near to top capacity, and had little in the way of options to counter OPEC's will, even if it wanted to. The steadiness of the market and consistent profitability made it undesirable to buck the system in place.

That has all changed with shale, where the power to bring oil to a desired price range no longer exists. If OPEC were to cut back on production to drive up the price of oil, shale producers would simply boost production, which fairly quickly would bring oil prices back down. If it were to keep supply high, as it's been doing, it drives down the price of oil, reducing the revenue it was accustomed to have for its people.

Saudi Arabia and OPEC can no longer control the mid- and upper price points for oil, it can only have an impact on the low side of the price because of the increase in supply beyond demand. For that reason the Saudis have called for the market to rebalance, essentially because it has no choice. A number of high-cost OPEC producers didn't understand what the Saudis understood, which is why for a time they persistently called for a production freeze, with the ultimate goal of it leading to a production cut.

The Saudis resisted this because they knew all that would happen is OPEC would lose market share to its American competitors. This is where we are today.

This will only change when demand increases to supply levels, which with current production levels, will take time, contrary to the overly exuberant financial media, analysts and pundits, who are acting like we're on the verge of a rebalancing because of some temporary outages.

Reason for OPEC no longer exists

A lot of investors don't understand the importance of Saudi Aramco engaging in an IPO, even if it's only about a 5 percent stake being offered. To be a publicly traded company includes legal requirements it can't ignore, and that means it will operate much differently than it has in the past. It's a nod toward breaking away from OPEC - at least in its independence from the interests of OPEC members. Whether or not it remains a part of it as a legal entity no longer matters. Saudi Arabia, by its assertions and actions, has already broken away from its reliance and connection to OPEC in any meaningful way.

I say this because Saudi Aramco is moving toward becoming that which germinated the idea of OPEC in the first place - a powerful energy companies.

The new oil market means OPEC members must start thinking in terms of competing on an individual level and not as an entity. This is why Venezuela, in spite of its openly public pleas, is being allowed to descend into the chaos it now faces. That wouldn't have been allowed to happen even in the fairly recent past.

OPEC members weren't going to sacrifice the stability and loss of market share in their own countries in order to support countries that continued to run operations at very high costs. They have years to make improvements, and either didn't have the ability, or believed the price of oil would remain high enough to mitigate their high costs. They were wrong.

More than anything else, this is why there is in reality, no more OPEC. Individual members will increasingly make decisions based upon their own best interests. The weaker members will be forced to adapt or make significant improvements and changes to make their oil more competitive. Over time that would be good for oil.

Why this is good for oil

As a whole, this may seem a disaster for those that had depended upon OPEC in the past to use its influence to produce as stable and fairly stable oil market. But over time, this will bring about a stronger industry that will be driven more by demand and competition, rather than restraints on supply to control the price of oil.

I think we're going to see an oil market that becomes less nationalistic and more free. Those high-cost producers will be forced to make deals with companies that have taken a lot of costs out of production. There will also be an openness to offering larger stakes in national companies, as in the case of Russia, which has already increased the percentage of foreign ownership allowed in its publicly traded energy companies.

For that reason there will continue to be a lot of volatility and lack of visibility in the market, as it isn't something it has experienced for a long time; it could be said even as far back as the founding of OPEC, or even earlier.

When a market emerges that is increasingly driven by the self interests of competitors, it's actually much stronger than when it is attempted to be driven by a cartel like OPEC. It takes a disruption like that by U.S. shale producers to become evident.

Conclusion

With increased competition, companies will be forced to continue to reduce costs while increasing the productivity of wells. This will eventually lead to a lot more profitability for those companies finding ways to increase efficiencies. They will be the future winners, which is why Saudi Arabia is distancing itself from OPEC. It understands it can no longer prop up weak producers who have made little or no improvements for many years. The increase in shale production has brought all of this to the fore.

Saudi Arabia is showing the way for other OPEC members, with Iran playing a significant role as well. Its decision to produce as much oil as is best for the country - no matter what the motivation is - is another show of independence that will eventually spread through all of OPEC.

I don't know if OPEC will continue as a figurehead organization, which is really all it is now. But whether it does or not, its purpose for forming in 1960 is no longer there, and energy investors need to look at each country as a standalone producer. That is how it'll play out long into the future.

Source: Seeking Alpha

What's Doha Got To Do With FX?

This weekend’s meeting of OPEC and non-OPEC members in Doha is important for currencies because when oil bottomed at the beginning of the year it set a peak for the U.S. dollar. If you recall, the greenback was trading strongly when oil prices hit a 10-year low of $26.20 a barrel and when oil started to recover, the dollar index lost its momentum and began trading sharply lower. So not only is the dollar’s value important for oil, but in recent years we’ve also seen how it can impact currencies and equities. Oil is particularly important to the Canadian dollar but it can also affect the market’s overall risk appetite. For the past few months, investors have been patiently waiting for oil-producing nations to officially freeze production. In mid February, Saudi Arabia and Russia, the world’s two largest oil producers made a preliminary deal to freeze output -- but it was contingent on Iran’s participation. Unfortunately, Iran supported the deal but refused to comply until its production returned to pre-sanction levels.

This weekend we'll see if oil producers are willing to move forward without Iran’s cooperation. If they agree to freeze production, relieved investors will reward the decision with higher oil prices, rallies for stocks, a lower U.S. dollar and stronger commodity currencies. But in order for there to be any real continuation, oil producers need to cut output -- and that’s unlikely. Saudi Arabia and Russia are producing oil at record levels and an output halt would still mean 300 million extra barrels of oil per year for the world -- excluding the added inventory provided by Iran. The International Energy Agency believes that a deal would not rebalance supply before 2017. A production cut was far more likely when oil was below $30 a barrel but at $40, the pressure to make any drastic change is limited. Of course, in the event of no deal, oil prices will collapse, commodity currencies will fall, stocks will extend lower and the dollar will rise as risk aversion returns to the markets. Either way, the Doha meeting is an extremely important event risk for the FX market this weekend.

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Has Oil Bottom?

has oil bottom? what does the oil chart is saying?

the oil chart has the positive no on bottoming. at best it is attempting at bottoming process.

have u heard of Oil and Gas company fold? not yet.

a proper bottom of any industry has to see M&A. so far none.

if the chart is any indication, oil may rebound near 40 and then go below 20. its a long process this time.

what u r seeing now is the Mega short covering of everything from stocks to oil to currencies. once this is over, there will be another new chapter to deal with.

my 0 cent opinion, if u dont agree, no need to shoot me. go bang the walls.

(My comments: Make sense. Found in i3investor forum)

Oil is going lower ...and lower ..

Seems like what this guy is saying that oil prices will go lower and remain low for at least till March-April 2016 (early spring).


Source : http://blog.smartmoneytrackerpremium.com/2015/11/charts-of-the-day-25.html

October 31 : 5 Things to know

1. Today is Halloween Day in the US. Lots of fun where people wear costumes and do pranks on each other. Some people think today the spirits will be released and allowed to roam a day before All Saints Day on November 1.

2. This week the KLCI Index dropped every day from Monday to Friday. Index seems very bearish (yet) the small cap and penny stocks rallied. Small is beautiful they say. Is November going to be like this too ???

3. Oil prices have rallied despite all the oversupply, strong USD, OPEC no action blah blah blah. Oil post first positive week in 3 and gain 4%. Oh because of this, when you go out later, please pump more petrol for your car. You can expect an increase in petrol prices tonight. Ha-ha.

4. The US rate hike story continue again ...this time need to watch the Dec 16-17 Fed meeting. Still a month and half away. There is a 50/50 chance Fed will increase the rate to 0.25%. It means the USD will be strong and RM will remain weak, for now.

5. XOX must be the hottest stock of the month of October. It keep going up despite 2 UMA from KLSE in a month! It look like a strong stock pump and dump to me. Some, not all, criteria, for a pump and dump are there.


GA

The Problem With Oil Prices Is That They Are Not Low Enough

The problem with oil prices is that they are not low enough.

Current oil prices are simply not low enough to stop over-production. Unless external investment capital is curtailed and producers learn to live within cash flow, a production surplus and low oil prices will persist for years.

Energy Is The Economy

GDP (gross domestic product) correlates empirically with oil prices (Figure 1). GDP increases when oil prices are low or falling; GDP is flat when oil prices are high or rising (GDP and oil price in the figure are in August 2015 dollars).


Figure 1. U.S. GDP and WTI oil price. GDP and WTI are in August 2015 dollars. Note: I use WTI prices because Brent pricing did not exist before the 1970s.
Source: U.S. Bureau of Labor Statistics, The World Bank, EIA and Labyrinth Consulting Services, Inc.

This is because global economic output is highly sensitive to the cost and availability of energy resources (it is also sensitive to debt). Liquid fuels-gasoline, diesel and jet fuel-power most worldwide transport of materials, and electricity from coal and natural gas powers most manufacturing. When energy prices are high, profit margins are lower and economic output and growth slows, and vice versa.

Because oil prices were high in the 4 years before September 2014 and the subsequent oil-price collapse, GDP was flat and economic growth was slow. That, along with high government, corporate and household debt loads, is the main reason why the post-2008 recession has been so persistent and difficult to correct through monetary policy.

Why Oil Prices Were High 2010-2014 and Why They Are Low Today

Brent oil prices exceeded $90 per barrel (August 2015 dollars) for 46 months from November 2010 until September 2014 (Figure 2). This was the longest period of high oil prices in history. Prolonged high prices made tight oil, ultra-deep water oil and oil-sand development feasible. Over-investment and subsequent over-production of expensive oil contributed to the global liquids surplus that caused oil prices to collapse beginning in September 2014.

Figure 2. Brent price in 2015 dollars and world liquids production deficit or surplus.
Source: EIA, U.S., U.S. Bureau of Labor Statistics and Labyrinth Consulting Services, Inc.

Oil prices were high during during the 4 years before prices collapsed because world liquids production deficits dominated the oil markets. This was due mostly to ongoing politically-driven supply interruptions in Libya, Iran, and Sudan beginning in 2011. The easing of tensions particularly in Libya after 2013 along with increasing volumes of tight and other expensive oil led to a production surplus by early 2014 (Figure 3). Before January 2014, supply was less than consumption but afterward, supply was greater than consumption.


Figure 3. World liquids supply and consumption, and Brent crude oil price.
Source: EIA and Labyrinth Consulting Services, Inc.

The global production surplus has persisted for 21 months and supply is still 1.2 million barrels per day more than consumption. This is the main cause of low oil prices that began in mid-2014.

Why Over-Production Continues

Actions taken by the U.S. Federal Reserve Bank to stimulate the economy after the Financial Crisis in 2008 were partly responsible for high oil prices and for the over-production of tight oil in the U.S. that eventually caused oil prices to collapse in 2014.

The U.S. central bank lowered the Federal Funds Rate-the interest that it charges for loans to commercial banks-from approximately 5.5% before the 2008 collapse to 0.2% in late 2008 (Figure 4). By mid-2014, the rate had dropped below 0.1%.


Figure 4. U.S. Federal Funds interest rates, M1 money supply and CPI-adjusted WTI crude oil prices.
Source: EIA, U.S. Bureau of Labor Statistics, U.S. Federal Reserve System and Labyrinth Consulting Services, Inc.

At the same time, the Federal Reserve Bank increased the U.S. money supply (Figure 4) from about $1.4 trillion before the 2008 collapse to more than $3 trillion today as part of a policy called Quantitative Easing (QE). QE involved creating money to buy U.S. Treasury bonds. This lowered the yield that these bonds paid and forced investors into riskier investments like the stock market and U.S. exploration and production (E&P) company bonds and secondary share offerings.

There is a negative correlation between the value of the U.S. dollar relative to other currencies and oil prices (Figure 5). When the U.S. dollar is strong, oil prices generally fall and vice versa chiefly because worldwide oil commodity trades are denominated in dollars.


Figure 5. U.S. trade-weighted dollar value and CPI-adjusted Brent crude oil prices.
Source: EIA, U.S. Bureau of Labor Statistics, U.S. Federal Reserve System and Labyrinth Consulting Services, Inc.

Quantitative Easing, the increase in the U.S. money supply and artificially low interest rates resulted in a weaker U.S. dollar that was a contributing factor to higher oil prices after 2008 (an OPEC production cut in early 2009 was another important factor). The end of QE in mid-2014 and a resulting stronger U.S. dollar corresponded with the collapse in world oil prices (Figure 5).

The relationship between interest rates, money supply, the strength of the dollar and oil prices is complicated and I do not mean to over-simplify its complexity. The observed patterns are, nevertheless, interesting and useful for understanding the broad trends of the last several years at least on a high level.

The net effect of all of these monetary policies was to undermine conventional, passive investments-savings accounts, CDs, U.S. Treasury bonds, etc.-because of low yields (1- 2.5%). Investors were driven to the U.S. E&P sector where high-yield ('junk') bonds and secondary share offerings provide yields of 6-10%. These investments are based on a coupon payment or dividend and not on the company's success unless, of course, the company goes bankrupt.

This and other risks are rationalized by the fact that the investments are in the fiscally 'safe' United States, are backed by a hard asset-oil and gas-in the ground, and that even if a company becomes distressed, it will likely be bought and the investment preserved.

More than $61 billion has flowed to North American E&P companies so far in 2015 both as equity and debt (Figure 6). This is more than in any previous year despite low oil prices, plunging stock prices and poor financial performance for most E&P companies.

Figure 6. Private equity capital directed to North American energy companies.
Source: Wall Street Journal (September 3, 2015) and Bloomberg Businessweek (October 15, 2015).

The only expectation from the financial markets is apparently that production and reserves grow or are at least maintained.

A weak global economy, the monetary policies that were used to strengthen it, and world geopolitical events combined to produce a surge in expensive oil production that was made possible by high oil prices and almost infinite access to capital by producers.

Now that oil prices have fallen by half, many expected that production would fall sharply.

That has not happened because capital supply has not fallen with lower prices but has increased. To be sure, U.S. production has declined and will decrease further. EIA's forecast (Figure 7) suggests that it will fall approximately 940,000 bopd from its peak in April 2015.


Figure 7. EIA crude oil production and forecast.
Source: EIA and Labyrinth Consulting Services, Inc.

The U.S., however, is not the world and less than a million barrels per day of lower U.S. oil production will not make much of a difference in the global surplus. Although world production has declined somewhat, it is still 850,000 bpd higher than its 2014 peak and a supply surplus persists (Figure 8).


Figure 8. World liquids production, consumption and production surplus or deficit.
Source: EIA and Labyrinth Consulting Services, Inc.

Global producers are similar to their U.S. counterparts. Most of them must also satisfy investor expectations, have considerable access to capital, must maintain cash flow, even at a loss, to service debt, and have benefited from greatly reduced oil field service costs that accompany lower oil prices.

The Problem With Oil Prices Is That They Are Not Low Enough

Brent international oil prices have averaged more than $55 per barrel ($51 for WTI) in 2015. As long as prices remain in that range, I doubt that production will fall enough to balance the market for several years or more barring a surge in demand or renewed supply interruptions.

Figure 9 shows that the long-term average oil price (1950-2015) is $45 per barrel in August 2015 dollars.


Figure 9. WTI oil prices in August 2015 dollars, January 1950 - August 2015.
Source: EIA, U.S. Bureau of Labor Statistics and Labyrinth Consulting Services, Inc.

Before the Arab Oil Embargo (1973-74) and the beginning of the Iran-Iraq War (1980), the average price was $23 per barrel. In the 1986 to 2003 period after these oil shocks and before the Financial Collapse, prices averaged $34 per barrel.

These prices seem quite low from our sticker-shocked perspective of the early 21st century, yet oil companies made profits when prices were $15 to $25 real dollars per barrel less than they are today. More importantly, those periods of low oil prices were also times of economic growth and prosperity (Figure 1), whereas the intervening periods of higher oil prices were times of low economic growth.

Capital will continue to flow to E&P companies as long as high yields on bonds and secondary share offerings are paid. Sustained oil prices in the $30-40 range would create sufficient distress among high-cost zombie producers to cause defaults on those offerings. This alone will stop the capital enablers-the investment banks-from directing funds to the E&P sector.

Many believe that the upcoming credit re-determinations and year-end reserve write-downs will greatly limit available capital, and that this will lead to oil market balance. I hope that they are right. I suspect, however, that the capital enablers will stay the course despite higher risks simply because they are unable to identify alternative investments that offer a comparable yield.

Some like OPEC and Wood Mackenzie believe that demand growth will balance the oil market. I also hope that they are right. Others, however, like the IEA take a more pessimistic view because of a weak global economy. The IEA's view of the economy seems sound to me and I am, therefore, doubtful that demand growth will balance the market.

Still others are hopeful that OPEC will cut production and that will balance the market. I don't believe that will happen. A production cut would accomplish little except perhaps for a short-term increase in prices that would result in higher cash flows and a rebound in drilling activity-in short, it would compound the problem of over-supply.

The only way to achieve oil market balance is for prices to go low enough for long enough to stop the flow of external capital to the producers and to force them to live within cash flow. The intriguing aspect of this proposition is the possibility of a return to economic growth that has so far eluded the best efforts of central bankers and economists.


Source: http://www.oilvoice.com/n/The-Problem-With-Oil-Prices-Is-That-They-Are-Not-Low-Enough/a42a7c59c41d.aspx

The Top 6 Reasons Oil Prices are Heading Lower

One of the major reasons as to why the RM is falling is the drop in crude oil prices as Malaysia is known to be an oil exporting nation. So will the oil prices recover? I think not so be prepared for more pain ahead .. Oil prices drop --> RM drop ---> stock market drop  ..get it ?

Here are the top 6 reasons that oil prices will remain weak for a long time. 

I re-posted the excerpts from oil-price.net for your own reading and analysis -

1. Iran Returns

Despite heavy fines by the US authorities against anyone trading in any way with Iran, that country has still managed to continue oil production over the past few years. Sanctions against Iran have existed in various forms since the eighties when religious fundamentalists overthrew the West-friendly Shah of Iran and committed a series of terrorist attacks against Western nationals. However, sanctions ramped up to the point of shutting Iran out of the oil markets in January 2012, when the US insisted that Iran cancel its program of tests of nuclear weapons.

At the beginning of April 2015 Iran signed an agreement to end its nuclear program and let in international inspectors to prove its commitment. Confirmation of Iran's compliance will remove the biting sanctions of 2012 and bring Iranian oil to international markets. Despite being stymied by US and EU sanctions, Iran is still able to produce 2.7 million barrels per day, of which 1 million is exported. The un-exported 1.7 million barrels meet domestic demand, but a large proportion is sent to storage.

The world currently has excess crude oil production of roughly 2 million barrels per day, so a cash-strapped, and slightly embittered Iran could have immediate impact on crude oil prices by putting its estimate 35 million barrels of stored oil on the market the day sanctions are lifted.

The impact of Iran's return to the market greatly depends on how quickly they can ramp up production. Bijan Namdar Zangeneh, Iran's oil minister, claims that the country could easily increase production by 1 million bpd within months of the lifting of sanctions. That worrying figure would increase the world's excess production by 50 per cent, which some analysts claim would push crude oil prices down to $20 per barrel. However, other analysts are skeptical.

Iran's production levels were at 4 million barrels per day in 2011 before the latest round of sanctions hit. Iran's isolation and denial of technology and investment capital means its oil industry has become badly under-invested. Their ability to get back up to former production levels could also be blocked by OPEC, of which Iran is a member. Nevertheless, Iran's return will prevent the world's excess supply from being reduced and so prices will fall.

2. Fracking is Not Going Away

Many believe that the 2014 fall in oil prices was specifically engineered by Saudi Arabia to knock out US oil production through fracking. Industry analysts estimated that heavy start up costs and financing requirements placed the break-even point of a fracking rig at around a $70 per barrel price of crude oil. Many saw the slump in the price of crude down to $60 and then to the $50 mark as a significant factor.

Sure enough, the rig count in the USA plummeted from 1,608 in October 2014 to 747 in April 2015. Seemingly, the lower oil price had squeezed out US oil production in the higher-cost fracking sector. However, the advancement of technology and the agility of fracking producers resulted in higher output from fewer rigs. In October 2014, the USA produced just under 9 million barrels per day. In April 2015, that output had increased to just under 9.5 million barrels per day.

Chinese oil production through fracking has risen to the same extent as USA production, with companies in both countries adopting and improving the same technology. In a world with an excess production of 2 million barrels per day, America's increased production means that oil prices are not about to rise. China's increases compound that situation.

3. OPEC is Idle

Previous oil price falls have been keenly countered by OPEC, the cartel of oil producing nations, centered mainly on Middle Eastern producers. Whenever oil prices fall, OPEC cuts quotas to its members, limiting their production and causing the price to rise through reduced output.

Saudi Arabia is by far the biggest producer in the OPEC club and the opinion of its oil minister, pretty much rules the actions of OPEC. If OPEC members decide to cut their production, but Saudi Arabia refuses to play ball, the resolution to cut would have no impact on oil prices, and thus be a worthless exercise.

Fracking started to provide the USA with a means of achieving energy independence. The country has already become a net exporter of gas, and similar performance in oil production would remove the USA's dependence on the Middle East for its oil supplies. Saudi Arabia's dominance of American oil supply enables them to entice the USA to deploy its military in the Persian Gulf at the direction of Saudi foreign policy. The Saudis want to return to the days of US dependence on Arabian oil and so refuse to cut their production in the face of falling prices.

Despite the apparent failure of the Saudi production tactic, OPEC shows no signs of changing its policy. The Saudis seem to be determined to continue forcing the price of crude down to squeeze out US production, but as fracking gets cheaper, output will continue to expand and the price of crude oil will continue to fall.

4. Russia Produces More

Political analyst point out that oil prices fell dramatically around the time that Russia invaded the Ukraine and the EU dithered over imposing the sanctions that the USA demanded. Although Europe did eventually go along with the policy of punishing Russia through trade restrictions, their reluctance to really hit hard has undermined US strategy.

Eyeing the success of an embargo on oil sales in bringing Iran to the negotiating table, the US administration, the theory goes, decided to depress the price of oil in order to bankrupt Russia and force it to cancel plans to take over the Ukraine. The Russian economy is overwhelmingly dependent on oil and gas exports, because it has little successful industry and is unable to match the West in the development of technology.

Saudi Arabia also has a cause to complain about Vladimir Putin's behavior. The Saudis loathe Bashar Assad, the President of Syria and want to see him overthrown. American and European governments seemed willing to play along with this policy until the Russians threw their support behind Assad and European determination folded. Without any significant allies to share the burden, the USA cancelled their planned invasion of Syria. The infuriated Saudis decided to take matters into their own hands and collapsed the price of oil with the intention of punishing Russia, not US frackers.

Vladimir Putin and his administration have complained loudly and frequently that the oil price fall was deliberately aimed at attacking the Russian economy. However, the steadfast determination of unrealistic quotas haunts the Russian mentality as an overhang of the Communist era. Putin needs money to continue his glorious and domestically popular policy of reassembling the Russian Empire. The Russians refuse to bend to market forces and so have made up the shortfall in their budget caused by falling oil prices by pumping out more oil. The Russian need for income means they are unlikely to make a tactical cut in oil output. Increased production adds to the downward pressure on crude oil prices.

5. ISIL's Days are Numbered

The Islamic State of Iraq and the Levant are said to be causing havoc with oil production in the Middle East. ISIL, originally called "the Islamic State of Iraq and Syria," first came to the world's attention when they threatened takeover of northern Iraq and Syria in the autumn of 2014 – just after the USA declared they would not intervene in Syria to overthrow its president.

Oil analysts talk up the oil price by warnings over ISIL's actions. However, the revolutionaries only managed to grab a small portion of Iraq's oil wells and actually increased production of their new assets in order to fund their cause. The ISIL bogeyman delayed the fall in oil prices by about a month and the havoc they have wrought across the Middle East has since failed to block that overproduction of 2 million bpd.

ISIL's greatest success in wrecking an oil producing country came in Libya, where they apply different tactics to the oil industry. Rather than profiting from Libya's oil wells, ISIL has been destroying them, thus knocking out a major oil producing nation. Simultaneous increases in production in the USA, China and Russia, however, mean that the loss of Libyan output has had no impact on the glut of crude oil in the world. The panic pricing in the oil markets that the group's initial appearance caused has withered away.

Europe's willingness to turn a blind eye to ISIL's activities in Libya came to an abrupt end in mid-April. Deciding to knock out oil production, rather than profit from it, ISIL turned to Libya's other money maker – people smuggling. The short distance between the Libyan coastline and the Italian island of Lampedusa makes the former slave trading ports of Libya ideal routes for illegal immigrants to sneak into the EU. Unfortunately, the greed and carelessness of the smugglers has resulted in overloaded ships sinking in the middle of the Mediterranean.

The death toll through drowning of ISIL's passengers has reached headline-grabbing levels and Europe's major military powers have resolved to put an end to the organization's activities. Although the smuggling gangs are the proposed targets of European airstrikes, the difficulty of identifying those activists means that Europe will have to restore a legitimate government to Libya in order to stop human trafficking.

It is significant that the proposed European strategy is to join Egyptian military efforts. The Egyptians have been routinely bombing ISIL in Libya since February. ISIL is easier to attack than other terrorist groups. With a standing army, rather than a terrorist cell structure, such as that of Al Qaeda, ISIL is more visible, and so can be engaged by a traditional military response. Its system of local governors and administrators require offices and infrastructure that are fixed and easy to bomb. The imminent defeat of ISIL in Libya means the oil industry there will be able to rebuild, the world's oil production excess will increase and crude oil prices will fall further.

6. No Demand

The excess supply in the oil market could easily be mopped up by increased demand. However, there is no great leap in growth expected in the world for the next couple of years. Energy efficiency and investment in renewable energy, such as solar, has permanently reduced demand for oil in most of the developed world.

Both the Federal Reserve and the People's Bank of China have announced they are ending their loose monetary policies. This free money pumped around the world inflated the prices of property, stocks, bonds and commodities. Part of the reason the oil price rose through 2013 and early 2014 was simply that the excessive amount of dollars in circulation had to be invested in something. Now that money has to be paid back, the asset price inflation of the past two years will be reversed.

The BRIC economies have failed to continue their stratospheric growth into 2015. In fact, some developing nations, like Brazil, are now in recession, with tumbling currencies cutting their populations' spending power. World trade is falling and demand for oil will fall with it. With few prospects of increased demand for oil, the chance of its price rising is zero.

Conclusion

The major oil producers have done nothing to cut production since October 2014, and they are unlikely to consider cutting output any time soon. The USA, Russia and Saudi Arabia each have different reasons to continue high output, but all three are just stockpiling oil because they cannot find enough immediate buyers. Add on the inevitable return of Iran and Libya and the prospects of the 2 million bpd excess production in the world reducing can be seen to be impossible.

Monetary tightening will reduce world growth and remove asset price inflation. Lower growth, coupled with lower need for oil through efficiency and environmentalism, means demand for oil is not going to exceed supply for a long time to come. The oil price is not going to rise any time soon.

Source : http://www.oil-price.net/en/articles/top-6-reasons-oil-price-are-headed-lower.php