26

By John Richardson

THERE is a tentative and rather fragile belief out there that oil prices have on this occasion finally bottomed in the mid-$35/bbl range.

This is partly based on the production freeze announced by Saudi Arabia and Russia in mid-February.

The  US Energy Information Administration also announced that US shale oil production fell in December by 1.8%. This was the first dip in US output in the year-and-half since oil prices first crashed. Last week, US production was also at its lowest level since November 2014.

But scratch the surface of this thinking and it is easy to find many reasons why oil prices may not have bottomed out.

These reasons include most obviously the Chinese economy. Everyone should now have come to terms with the reality that there are going to be no quick fixes to its difficulties.

And of course as China struggles through its reform process, the knock-on effect on other economies is huge.  Economic conditions in China, and so the rest of the developing world, will get worse before they get better.

The production freeze that was announced by Saudi Arabia and Russia in February was  also only that – a freeze. There as yet has been no agreement to cut production, and geopolitics suggests that such an agreement will be difficult to reach.

And, anyway, as Saudi Oil Minister Ali Ibrahim Al-Naimi said last week in dismissing the prospect of a production cut: “Why talk about production cuts when the marginal cost curve will do its job?”

In other words, Saudi Arabia, the lowest cost producer, will continue to pursue its market share battle, armed with the fact that it of course remains the world’s lowest cost producer.

And the freeze in production was something that Iran declined to participate in. Why the Iranian decision is so important is now that sanctions have been lifted, Iran is capable of producing and selling a great deal more oil – and that is exactly what it will do to make up lost ground on economic growth. The chances of it actually cutting production are therefore extremely remote. Further, Iranian production costs are thought to be as low as $1.70/bbl.

The recent slight bounce in oil prices has also enabled shale-oil producers to take out hedges for $45/bbl in future markets. So of course actual oil prices to trade lower than this, the producers have shielded themselves.

What’s also interesting is that because some people think the worst of the oil price collapse is behind us, shale oil companies have been able to sell more equity – and thus improve their financial standing;

Add this the fact that fracking technology improvements have resulted in a 65% or so fall in shale-oil production costs over the last 12 months and you return to this conclusion about US shale oil: The nature of this business means that when oil prices pick up they will very quickly retreat again as US production increases. US shale oil players are the world’s new swing producers.

So if you buy into the idea that oil prices have bottomed out, you are essentially still in denial. Here, in a nutshell, is all you really need to accept about today’s crude and other commodity markets: We are in a world of lingering excess supply and a secular long term decline in demand.

Tomorrow’s price then? Well, of course prices might still rise in the short term on the confidence that we have indeed reached a bottom to the market. And the speculators are again playing their usual games to profit from this argument by going long, thus perpetuating and boosting the rally.

But remember that the long term average price of oil is $26/bbl. There are plenty of reasons to believe that we are returning to this long term average.

PREVIOUS POST

Manage Demand And Keep Control Of Your Business

02/03/2016

By John Richardson CHEMICALS companies don’t always disappear when things turn...

Learn more
NEXT POST

China: Wrong Questions Will Give You The Wrong Answers

07/03/2016

By John Richardson IF you start with the wrong questions about China, you are ob...

Learn more
More posts
Why China’s polyethylene imports could be either 22m tonnes or 3m tonnes in 2030
27/10/2020

By John Richardson THERE are so many angles to this that, as with the potential outcomes of the US p...

Read
Debate about refinery closures, re-configurations a harmful distraction for the petrochemicals business
25/10/2020

In the second of a four-part series of blog posts that examines the paradigm shift confronting the p...

Read
Developed world polymers demand: layer after layer of new complexity
22/10/2020

By John Richardson THE PROPOSITION that petrochemicals and polymers demand in the developed will see...

Read
China rapid rebound promises another great year for petchems, but beware of the fault lines
20/10/2020

By John Richardson IT helped immensely that as the rest of the world was shutting down, China’s fa...

Read
Plastic rubbish: the pandemic is increasing rather than reducing the pressure for change
18/10/2020

This is the first of a series of blog posts where I will examine the environmental paradigm shift an...

Read
Retreat of globalisation and implications for petrochemicals
15/10/2020

By John Richardson EVER SINCE the Berlin Wall fell in 1989, and the last great geopolitical struggle...

Read
European petrochemicals at risk of delayed demand collapse as new business model emerges
06/10/2020

By John Richardson AS DELEGATES take part in this year’s virtual annual European Petrochemical Ass...

Read
US polyethylene: resilient demand could be at risk from delay to new stimulus
04/10/2020

By John Richardson THIS REMAINS a mystery that needs to be solved: why US polyethylene (PE) markets ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more