Tumbling oil prices could recover as soon as 2016, especially if OPEC decides to change its stance on oil production and global energy demand continues to pick up speed.
An oil pump jack in the city of Almetyevsk, Tatarstan, Russia. Photo: TASS
For oil exporting countries, of which Russia is one, the prospects remain dismal. Hopes for a budget windfall and economic revival from a rise in the price of “black gold” are receding fast. Whereas in spring the price stabilized at just above $60 per barrel and seemed on the way up, by the end of summer oil, was trading at below $45 and poised to slip even further.
The cause is well known and has been for some time: the glut of oil in the world market. According to the International Energy Agency (IEA), daily production outstrips consumption to the tune of 3 million barrels. Every day around 100 million barrels are produced — the highest level this century. And that is despite the fact that in the first quarter of this year supply exceeded demand by just 0.5 million barrels per day.
International oil companies, both private and public, are loath to cut production. On the contrary, they are increasing it so as to somehow compensate their losses from falling prices this past year. On top of that, newly “liberated” Iranian oil has yet to hit the market, which could add another million barrels a day.
As a result, most experts are warning of a price of $40 per barrel or lower. The other day, for instance, Kazakh President Nursultan Nazarbayev predicted $30 a barrel, and Russian Economic Development Minister Alexei Ulyukayev, who is always careful in his pronouncements, admits the possibility of a range between $30-40.
But the market is not so straightforward. And scenarios do exist that could change the direction of the downward spiral.
The first such scenario, as highlighted by the IEA, is linked to increased global demand for oil. This growth, says the agency, has already begun, and could one day outstrip supply, making "Texas tea" a scarce commodity once more. Daily demand for oil this year will rise by 1.6 million barrels (expected to reach 95.24 million barrels in the fourth quarter), or 200 barrels higher than earlier forecasts. Growth rates are at their highest in five years, not least due to the very fact that oil has become cheaper and thus more affordable.
The IEA asserts that the process of restoring the balance in the global market is underway, and given the right circumstances, demand will again match supply in about a year's time.
Of course, the dynamics of demand could still be negatively impacted by the situation in China's financial markets. In recent days, the Chinese authorities have taken unprecedented steps to weaken the yuan in order to avert a stock market collapse and prevent the country from sliding into a full-blown economic crisis.
The devaluation of the yuan will increase the dollar price for China of commodities such as oil, which could hurt demand for oil in China, the second largest consumer of petroleum in the world, after the United States. A possible slowdown in the Chinese economy will mean less demand for the black stuff, which, of course, could cause the price to drop again.
But things could play out differently. After all, the devaluation of the yuan, as many financial market experts posit, could unleash a new "currency war" — when central banks around the world experiment with lowering their own currency to breathe life into the national economy. The weaker the currency, the more competitive the goods produced at home. If a race to the bottom ensues in the foreign exchange market, stock market players will turn their gaze on the oil market, which could push up the price of a barrel.
And let's not forget that the Organization of Petroleum Exporting Countries (OPEC), which so far has preferred not to intervene in the "priceonomics" of the situation, could soon revise its intransigent philosophy. The fact is that falling oil prices are drilling a deep hole in the balance sheet of Saudi Arabia, the leader of OPEC and the global oil market.
The Saudi budget, which is 90 percent dependent on oil exports, has factored in an average price of $100 per barrel. And since the actual price of oil has turned out to be rather lower, the kingdom is facing a budget deficit of up to 20 percent of GDP, or $140 billion. Such a shortfall could force the Saudis to abandon their policy of non-interference and adopt measures to stabilize and slowly bring up the oil price, including through OPEC.
Moreover, the policy of low oil prices seems to have hit U.S. oil shale companies, too. At any rate, the leading producers of oil shale in the United States posted losses of hundreds of millions of dollars in the first half of 2015. Earlier this year, Raiffeisenbank analysts suggested that oil shale projects in the United States need a price of $55-65 per barrel to stay viable. That level is on the horizon, and companies are signaling imminent losses. If the U.S. shale business does indeed go bust, it will inevitably reduce global oil supply and push the sinking barrel upwards.
In the meantime, according to ten investment banks recently polled by The Wall Street Journal, the price of oil will hit $70 per barrel by the end of next year. True, this is short of the $100 estimates given in June last year, but a fair bit higher than the $40 forecasts elsewhere. It may yet turn out that rumors of oil's demise have been greatly exaggerated.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.