Chief Executive Officer, Economic Associates, Ayo Teriba argues that Nigeria could have avoided the economic recession, devaluation and inflation that accompanied the loss in foreign exchange revenue due to decline in crude oil price between 2014 and 2016
The Canadian company, Carbon Engineering, has indicated that the technology it has developed can capture carbon directly from the air for under $100 a tonne, rather than the current price of $600 per tonne…
Oil producers use futures contracts to hedge their exposure to production in an effort to protect themselves from losses should the price of U.S. crude fall suddenly.
Oil prices could rally to $100 a barrel next year, a level not seen since 2014, as supply risks in Venezuela and Iran strain global markets, according to Bank of America.
Flashpoints in the Middle East and North Africa have already been the main focus of attention this year and have the potential to cause fresh price volatility, particularly as global spare capacity thins and economic recovery stokes demand growth.
On simple accounting terms Saudi Arabia, Iraq and Iran can generate profits with oil prices at $20 to $40 per barrel. U.S. shale by contrast requires about $50 to $55 per barrel. If one looks at the fiscal break-even price, OPEC producers require an estimated $70 per barrel this year, higher than the $40 to $60 required by listed energy companies to fund capital expenditure and dividends. With respect to external break-evens, i.e. the oil prices needed to foot import bills, the spectrum is wide: Libya needs $140 a barrel and Norway needing just $20.
Russian president Vladimir Putin met with Saudi Defense Minister in Sochi on October 11th, while Russian Foreign Minister Sergei Lavrov was holding a meeting with his Saudi counterpart. The parties discussed Syria and agreed upon the necessity to prevent the creation of a terrorist caliphate. The levers of a hypothetical Russian-Saudi deal would be: a rise in oil prices, possibly accompanied by Saudi arms purchases, and on the Russian side, the guarantee that Assad will leave after a transition period, along with some kind of a Saudi “right of scrutiny” on Russian arms sales to Iran.
Due to a surge in oil hedges, the oil-price weakness will not prompt US producers to pull back on drilling. The producers rushed to lock in oil prices above $50 a barrel after the OPEC production cuts announcement in November, and will use hedging gains to help plug any budget deficits caused by sub-$50 spot prices. However, most of the hedges expire by 2018, and oil futures prices must recover before producers can lock in prices over $55 a barrel for next year – a level needed for significant tight-oil production growth.
Policy makers in Moscow see Urals oil at an average of $50 a barrel this year, but falling to $40 at end-2017 and then staying near that level in 2018-2019. Russia’s Finance Ministry similarly highlighted the $40 level in January when it announced that the central bank would start buying foreign currency on its behalf when crude exceeds that level in order to insulate the exchange rate from oil volatility. The price of $40 is additionally being used to calculate the country’s budget in 2017-2019.
Saudi Arabia has cut the pricing for some of its April oil sales to Asia, showing that it is trying to lure buyers toward its lighter and less sulfurous crude varieties. “This came as a complete surprise to the market,” said Tushar Tarun Bansal, director at Ivy Global Energy in Singapore. “This is a signal from the Saudis that they are serious about market share and pricing crude competitively, and would even be open to changing the methodology if the need arises.” This is the producer’s latest effort to defend sales in Asia.
The EIA forecasts Brent prices to average $53 a barrel in 2017 and $56/b in 2018, with WTI $1/b less than Brent in both 2017 and 2018. However, “The current values of futures and options contracts suggest high uncertainty in the price outlook. For example, EIA’s forecast for the average WTI price in December 2017 of $53/b should be considered in the context of NYMEX contract values for December 2017 delivery. Contracts traded during the five-day period ending January 5 suggest the market expects WTI prices could range from $35/b to $93/b (…) in December 2017.”
After the biggest oil-market deal in a decade, OPEC faces a new balancing act in 2017: boosting prices without igniting shale. But the biggest threat to OPEC’s plan could come from within: if Nigeria and Libya were to reach their potential next year, then their additional barrels would almost wipe out OPEC’s supply cuts; and Iran could be making up for several years of sanctions. Another challenge could come from the now leaner and more efficient U.S. drillers – a bigger boost in prices could mean a million-barrel shale surge.
The oil industry must brace for five energy “tsunamis” that threaten to drag prices as low as $10 a barrel in less than a decade, according to Thierry Lepercq, head of research, technology and innovation at Engie SA. The falling cost of solar power and battery storage, rising sales of electric vehicles, increasingly “smart” buildings and cheap hydrogen will all weigh on crude: “Even if oil demand continues to climb until 2025, its price could drop to $10 if markets anticipate a significant fall in demand.”
Wood Mackenzie’s global corporate outlook for 2017 forecasts that the oil and gas industry will turn cash flow positive for the first time since the downturn, if OPEC production cuts drive oil prices above $55 a barrel. Focus is on five themes: strengthening finances as a top priority; U.S. Independents to lead the sector into a new investment cycle; portfolios will adapt, down the cost curve and into new energy; modest growth in production despite past capex cuts; and an improved value proposition for exploration and mergers and acquisitions.
According to the International Energy Agency oil stockpiles will decline by about 600,000 barrels a day in the next six months as curbs by OPEC and its partners take effect. Oil has gained about 17 percent since OPEC agreed on November 30th to trim output. The accord was expanded on December 10th with the participation of 11 non-members including Russia and Kazakhstan. The stockpile declines will only occur if OPEC reduces supply enough to maintain a target of about 32.7 million barrels a day, said the Agency.
OEF REVIEW:The Brookings report “Lower Oil Prices and the U.S. Economy: Is This Time Different?” explores the effect on U.S. real GDP growth of the sharp decline in the global price of crude oil and hence in the U.S. price of gasoline after June 2014. This decline produced a stimulus of about 0.7 percentage points of real GDP growth by raising private real consumption and an additional stimulus of 0.04 percentage points reflecting a shrinking petroleum trade deficit. However, the net stimulus since June 2014 has been effectively zero. No evidence of an additional role for frictions in reallocating labor or the price of gasoline in explaining the sluggish response. Neither was there evidence of lower oil costs stimulating other business investment, nor an increase in household savings, nor of households deleveraging.
High regional gas prices in South America, most notably Argentina, are attracting US exports of domestically produced LNG, with more than 70% of landed cargoes arriving on the continent so far this year. South America has offered the most profitable destination for US exports compared with Europe, the Middle East and Asia. Regional gas markets, particularly in Argentina, are experiencing elevated prices. In an effort to stem the decline in gas production, the Argentine president cut domestic subsidies in December. His administration hopes that higher wellhead prices will revive production in older fields and stimulate new production, particularly in the Vaca Muerta Basin where large untapped volumes remain locked in shale and tight gas reservoirs. In March and April the first and second US cargoes to arrive in South America landed in Brazil, and since April, all eight US cargoes exported to the region have landed in the Southern Cone nations of Argentina and Chile.
OEF REVIEW:Oil analysts are looking to next year for a rebound. Crude has plunged as refineries created a glut of gasoline while failing to eliminate excess supply of crude. That wrecked refining margins. Yet, global oil prices will average $57 a barrel in 2017, according to the median of at least 20 analyst estimates compiled by Bloomberg. “We’re looking at a market that’s still in a very slow process of rebalancing and we don’t think that you’ll get a sustainable deficit until the second quarter of 2017,” said Michael Hsueh. Oil companies’ capital expenditure reductions are set to reach $1 trillion by 2020 and this lack of investment “will have a big impact on global supply,” said Hans Van Cleef who forecast Brent will reach $70 next year.
OEF REVIEW:Crude could return to $100 a barrel because the two-year market downturn has curbed investment. Except during the financial crisis in 2008, average Brent prices increased every year from 2002 to 2012, and topped $100 a barrel from 2011 to 2014 and leading companies into higher-costs projects and capacity building that outstripped demand leading eventually to a collapse in prices.
OEF REVIEW:Oil investors are buying contracts that will only pay out if crude oil rises well above US$100 a barrel over the next four years – a clear sign some believe today’s bust is sowing the seeds of the next boom. The options deals, which brokers said bear the hallmarks of trades made by hedge funds, appear to be based on the belief that current low prices will generate a supply crunch. Over the last month, investors have bought call options for late 2018, 2019 and 2020 at strike prices of US$80, US$100 and US$110 a barrel. Previously, some investors had already built super-bullish positions. The options deals suggest a concern about shortages as demand begins to outstrip production – the traditional boom and bust commodities cycle.
