In recent weeks we have seen the Brent crude oil price recover from its record January lows when prices of the global benchmark dipped to as low as $27 per barrel, a massive 70% fall in price since June 2014. Today however, prices have recovered somewhat with the benchmark now pegged at around $41 per barrel. Oil prices are difficult to predict and although several top Wall Street CEOs, oil analysts and international energy organisations (the IEA for example) try and give guidance in an effort to reassure the markets it rarely works out the way they see it. Bloomberg comments a leading investment bank said that the oil market had ‘bottomed’ back in May/June last year, price promptly fell from around $60’s per barrel to the low $40’s by August. The same has been said by the IEA about this latest resurgence, although it is not so clear yet whether it can be sustained. That said, since January the global benchmark is now $14 up on its lowest point. The current forecast price from the Reuters end monthly Oil Poll, taken from top investment bank analysts, shows a 2016 expected average price $40.1 per barrel, and $53.9 per barrel for 2017 with forward swap curve showing contango, ie. Future spot pricing for faraway deliveries is higher than the current spot price. There is little doubt that from a macro perspective that large peaks and troughs in oil pricing will filter down to Specialised Products transportation due to the broad spectrum of chemicals, lubricants, vegetable oils and palms oils that constitute this market and its close relationship with the end consumer.
So what has prompted the recent increase? Oil prices are affected by a whole range of different factors and are largely uncontrollable. However, the lion’s share of influence can be left at the geo-political door with decisions largely made on economic and supply/demand considerations. Often these decisions have been cast as politically self-serving, OPEC’s refusal to cut production levels being a case in point here. The steadfast refusal to cut production, in the face of increased US shale oil production, to boost pricing has been kicked deftly into the corner. Whilst this is a political and largely economic game other factors such as war, terrorism, regulation and taxation also play a part here.
Despite these closed door discussions and negotiations, the recent announcement from OPEC that Saudi Arabia and Russia that they would freeze production at current levels represents the first example of cooperation between an OPEC and non-OPEC producers in 15 years. In an effort to end the global supply glut a meeting will now take place in Qatar on 17th April led by Russia to agree a supply deal. The outcome of this is not certain but along with a weaker US dollar and stronger seasonal demand, it certainly adds weight to the IEA’s assertion that prices had ‘bottomed’ out.
Meanwhile, the number of US oil rigs still operating has fallen to historic lows with the number now at 94, a 90% fall from peak levels seen five years ago but this has not dampened production levels. The EIA is forecasting a total of 8.7 million barrels per day in 2016, a minor fall from 9.4 million barrels per day in 2015. Despite the stress felt by US producers, levels still continue to rise. This coupled against a backdrop of weakened oil demand from China doesn’t exactly help the rhetoric that this resurgence is sustainable. Another point here is the spectre of Iran and the fact that it will refuse to sign up to a production freeze, a fact that is hardly surprising considering its recent re-entry to the global market place. Question marks over the longevity of sanctions relief also remain unclear with the outcome of the US Presidential election.
So where does this leave the Specialised Products markets? From a petrochemical production perspective Europe and Asia have been given a margin boost due to more competitive naphtha feedstock pricing whilst arguably shale gas derived production has had its price advantage eroded somewhat. This is old news and for now the rise in oil pricing will unlikely cause an immediate change to the status quo. However, in the last couple of weeks producers with interests in US shale gas have been marking their lines in the sand. Valero has said that they have decided to shelve their methanol project indefinitely whilst Sasol are also delaying progress on their ethylene project at Lake Charles.
The oil price outlook is certainly an interesting debate and is one that will no doubt continue to rage on. All parties have differing viewpoints and with the April 17th meeting on the horizon, only then might we have greater clarity on exactly how ‘resurgent’ oil prices are!