Still a Bumpy Ride for Oil Prices

Barrels of oil

Despite crude oil glut, prices last week reached a 2016 high of almost $45 per barrel. But market analysts believe it is still a long road to projected price targets, even with a planned meeting of producers this weekend in Doha, writes Chineme Okafor

Last week, oil prices reached the highest levels so far in 2016 when on Wednesday, April 12, Brent futures closed at almost $45 and Western Texas Intermediate (WTI), a grade of crude oil used as a benchmark in oil pricing also sold at more than $42 per barrel.

While these closures marked the highest oil prices since early December 2015, they however happened at a period global over-supply of oil got worse in March.

According to recent data from the American Energy Information Administration (EIA), the net surplus which is supply minus consumption for oil increased to 1.45 million barrels per day, when compared to February data, the surplus increased by 270,000 barrels per day.

This, analysts believe is not encouraging for a strong price recovery that may be underway as anticipated by some producers like Nigeria whose reserves and spending power have reduced considerably by the price dip.

In February, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, stated his optimism of a price rally to about $45 and $50/b in 2016, hinging his optimism on a planned production freeze that members of the Organisation of Petroleum Exporting Countries (OPEC) and Russia could achieve at a meeting in Qatar this weekend.

The Qatar meeting will however go on but with the knowledge that consumption according to the March data of EIA decreased by 250,000 barrels per day and that this is not a very good news to their ears.

The data also suggested that the recent price movement were either buoyed by a bit of export deferrals from Nigeria, Northern Iraq and the United Arab Emirate (UAE). The three had reasons to see supplies from them drop within the period that prices rose, though not entirely deliberate in some cases like Nigeria.

Yet, Kachikwu’s confidence that the Doha meeting this weekend could advance what he and others in similar shoes believe would nudge price towards $50/b – freezing oil production output at current levels – is however looking quite challenged by recent statements made by Russia’s finance minister, Anton Siluanov, that Russia did not expect to see any significant changes in prices.

“I want to say that we don’t expect any changes in the price in spite of the negotiations which are being conducted currently with oil-extracting nations,” Siluanov had on Thursday told CNBC.

Siluanov further explained to CNBC that Russia was trying to find ways to work with the current oil price or around $40/b and had in fact based its economic projections on such a price.

He said: “Our economic plans are correlated in relation to the current oil price – about $40 a barrel. That is why we see that in the conditions of the slowing down of world economic growth rates, the accumulation of oil reserves by producers, there are no serious grounds for talking about increasing oil prices. We see that we will have to work within the conditions where oil prices fluctuate around $40 a barrel.”

Siluanov whose country’s economy is also impacted adversely by the price dip and international sanctions imposed on it for its annexation of Crimea as well as its role in the pro-Russian uprising in east Ukraine spoke in line with what Iran wanted to hear.

Intensely, Iran does not favour cuts in production levels because it is still trying to recover its oil industry after years of economic sanctions.

Analysts however believe that such somewhat inconsistent positions of producers could result to a disappointing outcome from the Doha get-together and that prices would continue to struggle.

According to CNBC, analysts at Goldman Sachs have warned that the meeting would unlikely deliver a ‘bullish surprise’ for oil markets. They also maintained their oil price forecast of $35/b in the second quarter of 2016.

Entitled ‘Doha is no panacea,’ the Goldman Sachs note also said that there was a ‘multitude of potential production growth sources’ to keep OPEC crude production growing.

With their analysts, Damien Courvalin, Jeffrey Currie, Abhisek Banerjee and Raquel Ohana, Goldman Sachs noted that even if OPEC and others reach an agreement to freeze production in Doha, “it would not accelerate the rebalancing of the oil market as OPEC (excluding Iran) and Russia production levels have this year remained close to our 2016 average annual forecast of 40.5 million barrels a day.”

According to them, this is possible because the balance of supply and demand in the global oil markets have not been in order since OPEC refused to cut production in November 2014, instead choosing to defend its market share in the face of non-OPEC rivals such as shale oil producers in the U.S.

But as explained in the EIA statistics, the recent increase in crude oil prices were on one side made possible by lower concerns associated with a slowdown in global economic growth, as well as, on the supply side, field maintenance in the UAE and lower crude oil exports out of Nigeria and Northern Iraq.

Nigeria as a result of breaks in its Forcados export terminal had to defer up to 300,000bpd of output within this period, the report said that such production cuts contributed to the price movements.

As maintenance in the UAE is scheduled to end soon and exports from Nigeria and Northern Iraq perhaps reach previous levels again, hopes of a steady oil prices rise may after all only be kept afloat by the outcome of the Doha meeting which Kachikwu said represents a big step in the right direction.

“I am certainly hoping for prices in the range of $45 to $50. I’m hoping a consensus can be built and that parties can begin to work together across the board, not just OPEC members, but also non-OPEC members, which is what the Gulf States and most of us have pushed for. With that, you’ll begin to see movement upwards in those prices,” Kachikwu again told CNBC.