OIL PRICES: FUNDAMENTAL UNBALANCE
On February 10, 2015 Rosneft Head Igor Sechin took part in the International Petroleum (IP) Week in London.
Igor Sechin made a presentation during the session "Seizing opportunities created by the changing markets, shifting trade patterns, and hedging against price volatility". In his speech he noted that currently oil markets are in an acute crisis.
"In the second half of 2014 there was a drop in oil prices, which crisis-generation rate was higher than anything that has been seen before. This breakdown is positioned as a "fundamental oil crisis", which distinctive feature is that the balance of supply and demand for oil remains fairly close, within the past decade's fluctuations" – said Igor Sechin.
He directed attention of the forum's participants to the fact that in the 1980s a significant drop in oil prices was accompanied by huge OPEC spare capacity which accounted for 24% of world consumption, as well as by major discoveries of traditional fields outside OPEC, such as the North Sea. Today, spare capacity amounts to only 5% of global consumption, which is only 2 percent, or 2 million barrels a day above the ten-year minimum.
"So, fundamentally, the crisis in oil prices in 2014 – is just a ripple on the water compared to the oversupply tsunami of 1985. The amount of excess capacity is five times less. Operating costs are 2-3 times higher. Instead of a deep drop in demand – a growth is recorded. The rate of decline in marginal production – is ten times higher. There is a clear unbalance between fundamental drivers and the observed price dynamics" - highlighted Rosneft Head.
Igor Sechin noted that the role of financial instruments and financial players in oil pricing has increased. Due to the fact that the oil market has become a kind of a financial market, speculative factors, including the movement of capital, liquidity, the popularity of alternative investment assets, rather than real economic factors began to exert elevate pressure on it. Another aspect of distinctive feature of financial markets is their amenability to outright manipulation.
According to him, in response to the extreme decline in prices, oil companies around the world significantly reduce their investment programs. Investment cut will inevitably lead to the restoration of the balance of supply and demand in the oil market, but excessive reduction of investment in production now could lead to a shortage of oil already in the fourth quarter of the current year.
Government regulation appears at the oil market, though, according to the Head of Rosneft, it often has protectionist sentiment and doesn't contribute to the efficient development of the global oil market. Overall, the competition for premium markets in the world is heating up, as does the struggle for extracting rents from oil. Governments of oil-consuming countries are imposing taxes on oil and gas, which are higher than those imposed by producing countries. In case of the European countries, taxes and duties on oil products are higher than the oil price itself.
The Head of Rosneft assumes that business and real oil market participants may oppose risks caused by regionalization, volatility and financial speculation by engaging in closer integration along the value chain and by building long-term relationships as the market infrastructure needs serious improvement.
In his judgment, it is necessary to control the influence of financial players in the pricing of oil and increase the role of the real producers and consumers with respect to the market participants and trading platforms.
For the improvement of the market information infrastructure the following should be done: reorganize the exchange infrastructure of the oil market via strengthening of the role of producers and consumers, accompanying this with an increase of transparency of the exchanges to reduce the possibility of price manipulation. It is also necessary to improve the efficiency and quality of market information.
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IMF - Output grew by 3.8 percent in 2017, underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors. The banking system remains stable with large capital buffers. Growth is projected to decelerate over the medium term.
IMF - Higher oil prices and short-term portfolio inflows have provided relief from external and fiscal pressures but the recovery remains challenging. Inflation declined to its lowest level in more than two years. Real GDP expanded by 2 percent in the first quarter of 2018 compared to the first quarter of last year. However, activity in the non-oil non-agricultural sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.