Oil markets to ease

Syed Rashid Husain

Where are the oil markets heading to?

A very interesting debate is raging within the energy fraternity — for it has long-term consequences and repercussions too. Indeed the foremost casualty of a melting market could be the short- to mid-term investments in the sector — so crucial to maintaining a reasonable demand-supply balance in the longer run.

Also in case of prices dropping further, some fields especially in the new emerging energy frontiers, could become economically unsustainable and unfeasible. And all this would have major consequences, especially on the supply side of the energy economics.

Currently the prices are oscillating around $100 a barrel for Brent crude. To most, this is a fair price. Oil Minister Ali Al-Naimi had indicated in Adelaide last month that Brent should drop to $100 as "supply outweighed demand" and prices hovered around $112.

What next  is now the question?

A downward price pressure is palpable. "The downward pressure on prices will continue until they reduce supply," says Manouchehr Takin, an analyst at Centre of Global Energy Studies (CGES).

Signs of reduced buyers' interest are emerging too!

Shipments this month have been lower, Vienna-based researcher JBC Energy GmbH underlines, citing tanker fixtures. Last week, Aramco raised the July official selling price to Asia of its main crude grade, Arab Light, for the first time in three months. This too was bound to impact the market appetite. The CGES felt it as a sign of reduction in output. "OPEC's doves have said $100 is their target, so they (now) have to defend it," underlines Takin. This is what they are doing now — some felt. With the OPEC next moot round the corner, this could pacify the hawks too.

The Kingdom has been pumping more than 9.5 million barrels a day since June 2011, the longest stretch for at least 11 years, according to data from the US Energy Department. Output has averaged 10 million barrels a day for the past three months, Oil Minister Ali Al-Naimi has been insisting. That's the highest level since at least 1980, according to US government data.

Despite the lingering embargo on Tehran, OPEC's is producing 6 percent above its quota, the Saudi Arabia's oil storage tanks at home and overseas are full, Chinese stockpiles are full too and the US crude inventories too rose to 385 million barrels in the week ended May 25, the highest in 22 years.

Demand for Saudi crude would drop to 9.5 million barrels a day in the second half, about 500,000 barrels less than what the Kingdom produced last month, according to JBC Energy. To balance the oil market, members of the Organization of Petroleum Exporting Countries needed to cut output, which is at "elevated" levels near 32 million barrels a day, by 1.15 million barrels, Morgan Stanley forecast said.

Hence despite some possible reining in of the output, crude markets could continue to feel the heat for some time to come, analysts underline. Oil prices could pull back to the $70 level over the short term, CIBC World Markets said last week in a note to clients. Oil and gas analyst Andrew Potter says oil prices have come under relentless pressure in the past 30 days, with near-month prices declining 10 percent as a result of macro-economic concerns. "If macro conditions continue to deteriorate we would not rule out a short-term pullback into the $70/bbl range," Potter underlines.

Oil prices will weaken further in the second half of this year as demand reacts to a slowing global economy, while international political tensions ease, Royal Dutch Shell CEO Peter Voser too added his voice last week to the bandwagon.  "At the same time, some of the geopolitical elements of price volatility over the past few months have kind of receded, and therefore we see a softening of prices which I expect to go well into the second half of this year."  The pace of oil demand would recover slowly in 2013, and prices would rise with it, Voser added.

In the given circumstances, crude markets could ease further, one could now say with some degree of confidence.