BackFree fall of oil prices seen at an end
Opec secretary-general Abdalla Salem El-Badri says low price cycle will change soon, in a few months or a year
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Singapore/New Delhi: Even with a global glut in oil supplies set to last well into 2017, indications are that a recovery in prices could get underway sooner rather than later.
To be sure, oil prices, which have fallen by two-thirds since mid-2014 to trade near 11-year lows below $40 a barrel, are not expected to regain the $100 mark until 2017 or later. But, the expectations are that the free fall in oil prices are beginning to bottom out.
Abdalla Salem El-Badri, secretary-general of Organisation of Petroleum Exporting Countries (Opec), the group of nations that account for majority of global oil production, signalled as much on Tuesday on the sidelines of a conference in New Delhi.
“I’ve been in the oil business all my life. I saw six cycles. I saw very high price, I saw low price, and this is one of them. This will not continue," Badri said, before adding, “In a few months or a year or so this will change."
He was addressing the first Opec-India Energy dialogue in New Delhi.
A growing number of traders are, nonetheless, positioning themselves for notably higher prices a year from now through the purchase of bullish call options.
In other words, countries like India will continue to enjoy the cushion only for a limited period. Low oil prices have been key in reducing the country’s oil import bill and in helping dampen inflation.
India will save an estimated $48-50 billion on its oil import bill in the current fiscal year, according to K. Ravichandran, senior vice-president of rating company Icra.
According to the International Energy Agency’s (IEA) World Energy Outlook 2014, India’s oil demand growth between 2013 and 2040 will be the highest in the world. But oil price volatility has deep implications for an import-dependent country like India.
Open interest in Brent crude call options tied to strike prices from $50 to $80 per barrel has climbed steeply in recent weeks, indicating growing confidence that prices will stage a strong recovery from current levels.
Factors supporting a more positive outlook range from higher car sales to heightened security and political risks in some oil producers and debt-laden shale firms on their last legs.
Indeed, some banks are now holding a more bullish view on the crude market.
“Although there are some downside risks for oil prices in the near-term, we believe that oil prices will recover in the course of 2016," ABN Amro said.
Morgan Stanley said that “continued demand growth and less supply mean that the oversupply in oil markets could disappear by year-end" of 2016.
The glut is a result of oversupply, yet global gasoline demand has been strong, thanks to rising car sales.
China’s November car sales jumped 20% from a year earlier, putting the world’s biggest automobile market on track for annual sales growth of 5-7%.
Even European car sales are growing, with Western European markets up 5-10%, according to monthly industry data.
US car sales are on track for a 2015 increase of 3% and are expected by the National Automobile Dealers Association to hit a record next year before dipping slightly in 2017.
India’s oil demand, approaching 4 million barrels per day (bpd), is also soaring as its economy grows at more than 7% a year and hundreds of thousands buy their first car.
The resulting demand is expected to spur refiners to produce as much fuel as they can and should bolster 2016 crude demand as long as refining margins remain profitable.
On the supply side, Opec is expected to maintain near record-high output next year, especially if Iran’s sanctions-hit sales fully resume. Outside Opec, Russian production is also showing no signs of slowing.
But US production—which rose from under 6 million bpd in 2010 to more than 9 million bpd this year, driven by output from shale—has started to fall as operators wrestle with mounting debt.
At the same time, China is expected to build its strategic petroleum reserves further, adding to oil demand that is already more than 10 million bpd.
Because of all this, IEA expects global oil demand to rise from an average of 94.6 million bpd this year to a record 95.8 million barrels in 2016.
With oversupply estimated between 0.5-2 million bpd, it would only take Opec pulling back from its current output of more than 31.5 million bpd to its long-standing quota of 30 million bpd to re-balance the market.
“The oil market remains more tightly balanced than is reflected in today’s low prices. The oversupply is about 1.5% of a 95 million bpd market with limited spare capacity in a risky political setting for weak petro states prone to disruption," Citibank said.
Brent was up 40 cents, or 1%, at $38.32 a barrel by 15.55 GMT. It came within 14 cents of snapping its December 2008 low of $36.20 on Monday.
Henning Gloystein is with Reuters and Mayank Aggarwal is with Mint.
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