© Nigerian Pilot
Oil prices are heading down again on swelling US crude oil inventories, with Brent dropping below $50 per barrel for the first time this year.
The OPEC deal that has taken more than 1 million barrels per day of oil off the market has not succeeded in reversing this bearish trend for inventories. And with the deal at its midway point, focus is shifting towards an extension of the cuts through the end of the year.
But OPEC's usual strategy of
jawboning the market back up ahead of these negotiations seems to be wearing thin amid record high crude oil inventories. "OPEC has used up most of its arsenal of verbal weapons to support the market.
One hundred percent compliance by all is the only tool they have left and on that account they are struggling,"
said Ole Hansen, head of commodity strategy at Saxo Bank. "OPEC's market intervention has not yet resulted in significant visible inventory drawdowns, and the financial markets have lost patience," investment bank Jefferies said in a research note.
Although projections from Wall Street banks tend to
vary quite a bit, there is a growing chorus warning about another slide in crude prices. At this point, the big variable is
whether or not OPEC decides to extend the deal when it meets in May - an extension would likely stabilize prices and might even push them back up into the mid-$50s or higher.
No extension and oil could fall much further into the $40s.
Looking out a bit further, things get much more complicated. Even if the supply/demand imbalance is taking a long time to correct itself, rising demand and tepid supply growth suggest that the glut will ease over time. At least that is the general consensus.
However,
Goldman Sachs warns that another downturn could come over the next three years, sparked by a
new wave of supply stemming from mega-projects planned years ago. These projects cost billions of dollars and take many years to bring online, and many of them were initiated back when oil prices traded at $100 per barrel.
"2017-19 is likely to see the largest increase in mega projects production in history, as the record 2011-13 capex commitment yields fruit," Goldman said in a note. "This long-lead-time wave of projects and a short-cycle revival, led by US shales,
could create a material oversupply in 2018-19." Goldman identified a handful of projects in Brazil, Russia, Canada and the Gulf of Mexico that will reach completion and add to global supply between 2017 and 2019. Combined with new shale output, these projects could
add another one million barrels per day next year.The investment bank also warned that the
markets have become overly optimistic on oil prices since the OPEC deal was announced nearly four months ago. It's not hard to see why. OPEC's production cuts in November ushered in several months of unusual stability in prices, ended a three-year run of spectacular volatility. It also sparked widespread
confidence in a price floor - with the cuts coming, oil prices likely wouldn't fall much in the near run, market analysts concluded, and over the longer-term, they would slowly move up towards $60 per barrel.
As a result,
US credit markets warmed up to new drilling again, and not surprisingly, spending and drilling activity are already on the rise. But Goldman says that shale output could come in higher than expected this year, disappointing those expecting higher prices.
Most European integrated companies are using a working assumption for their budgets that oil prices will average $60 per barrel in 2017, with an upper end bound of $80 per barrel between 2018 and 2020. That stands in
sharp contrast to Goldman's projections of oversupply for the next three years.
In short, we have a situation in which shale output is surging too quickly, before OPEC has had the chance to balance the market. On top of that, production from yesteryear's mega-projects will soon come online, exacerbating the glut. The only thing that will prevent another downturn in prices would be an extension of the OPEC cuts, but as Goldman points out, the group has to "weigh the relative benefit of stability (extend the cut) vs. the risk of long-term share loss."
OPEC has been burned before when it tried to cut back, losing market share without a corresponding increase in prices. So far in 2017, the same thing is occurring. That might make OPEC members think twice about continuing to shoulder the burden for the global market, ceding market share to shale companies already on a spending spree. It's not clear how this will shake out, but it's safe to say that, at this point,
there is more danger on the downside for oil prices than on the upside.
Currently we use hybrid (internal combustion/electrical engine) cars. Resources of all kinds exist everywhere but apparently it was decided that we need kerosene (produced from oil) for both commercial and military aircrafts including choppers because if we drain the earth's resources before we find or construct a new Earth we are finished. This planet is 4.5 billion years old, we 've been around what, 80,000-100,000 years , I'm not sure about these last two numbers and we are already sucking this planet dry. I mean let's face it, every day we create more problems than we can solve.
So the general directive is that natural gas will be used for heating, kerosene for anything that's flying, and electricity for everything else.
The problem was with flying. In the past they had tried nuclear energy but there were problems with the cooling process, so it was abandoned, and although we have antigravity vehicles they are reserved for space trips (antigravity requires huge amounts of energy).
Plus there was another reason that I think was strictly political. After the mayhem in middle East the past 25 years the West doesn't want to depend on OPEC countries in order to move around and that includes commercial vehicles in both Europe and the U.S. So apparently they decided we 'll use battery powered cars but in my humble opinion that will only create new problems. If the West showed some sanity and respectively major oil producing countries showed some sanity too, we could reach a sane agreement and a somewhat "normal" oil price could be agreed upon. However the West consumes everything like there's no tomorrow and middle-easterners think they are Masters of the Universe (you won't believe what I've seen). So there's no logic on this issue on either side.
There's an alternative but again I don't think Europe wants to use it. Russia. Europe depends for heating on Russia. They could, if they wanted, to buy oil from Russia but again they don't want to depend on Russia and I'm not so sure the Russians would like to sell their oil to Europeans. They are selling something cheaper : Natural gas. Also , currently the French along with the Germans are building the most advanced nuclear power plant on the planet and most likely they will sell that know-how to the rest of the world at a high price. That's why OPEC oil is or eventually will be abandoned. Both sides got greedy. Sounds familiar ?