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Ideas & Debate

Global oil prices could go either up or down

 

Numerous oil supply-side happenings around the world are making it difficult to analyse global oil price trends. However what appears to be a fact is that the world has (or can produce) enough oil to sustain the current subdued global oil demand.

If the world was not awash with oil today, prices would by now have shot up past $100 per barrel considering the ongoing supply-disruptive geopolitics which I will analyse here below. This week prices are at about $74, having climbed from the upper half of $60s in the past month.

Venezuela, a key Organisation of the Petroleum Exporting Countries (OPEC) producer, has been losing oil production and exports as a result of ongoing economic incapacity and also due to severe economic sanctions imposed on its oil exports by US President Trump. Production dropped by nearly half from 1.4 million barrels per day (mbpd) in 2018 to the current levels of 0.75 mbpd.

Libya, another OPEC oil producer, is currently in full civil war as a general from eastern Libya attacks the capital, Tripoli. This has increased risks of losing much more oil production and exports.

In the neighbouring Algeria (an OPEC producer), a tumultuous political transition threatens political stability, and this can potentially lead to oil production loss. Sudan, oil-producing country and which also transits South Sudan oil, is experiencing political uncertainties as it tries to transition into democracy.

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In the Middle East, the economic sanctions imposed on Iran by the US are still in force with reduced oil production and exports. The waivers granted by the US to key importers of Iranian oil to continue with limited Iranian oil imports, are due to expire in the next few weeks. If these waivers re not sufficiently renewed, there will be even less Iranian oil going into the global markets.

With all the above supply-disruptive situations, one would have expected oil traders and speculators to have “talked” oil prices upwards. This has not happened because the US shale oil producers are pumping out a lot more oil into the US and export markets and therefore compensating for the losses. This is happening because the current global oil prices are high enough to prompt increased production of shale oil.

But these high prices have been possible because the OPEC and Russia have foregone oil production through their January 2019 agreement to reduce production by 1.2 million bpd, an agreement which is due for renewal in June this year.

The OPEC/Russia production controls were intended to prevent oil over-supply and a potential price drop to uneconomic levels. It is this self-imposed production cut, together with outages in Venezuela and Libya that have supported the current rise of prices to above $70.

The current OPEC/Russia predicament is that their reduced production and exports and resulting high prices, are mostly helping US shale oil producers increase their global oil production and exports at the expense of OPEC and Russia market shares. It is this displeasure that puts into question continued production cuts beyond June this year. If these controls go, prices will most likely be set on a decline that could see them down to below $50, a familiar but painful place that the oil industry experienced some four years ago.

If the OPEC production cuts remain, oil prices could potentially increase towards $80 and beyond. However President Trump has a way of “tweeting” prices back to his $70 trigger level by coercing and threatening his Saudi allies.

Back in Kenya, ERC prices posted last week only reflected global price changes that occurred in February/March at around $65. Since then, prices have increased higher to the current $74. It is therefore not inaccurate to expect further pump price increases in both May and June.

At $70 and above, it becomes more and more attractive to develop and export Turkana oil resources. Unfortunately the government and investors do not appear to be making real progress. They are yet to align their commercial interests and expectations. However, the publication of Petroleum Act 2019 last month has cleared the legal paths.

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