Cautious Optimism as Oil Heads to $60/b


Oil workers busy on a rig

Signs that crude oil prices at the international market are inching northwards and could hit $60 per barrel before year end are emerging but not without cautious optimism from industry pundits, writes Chineme Okafor

Last week, the United Arab Emirates’ economy minister, Sultan Bin Saeed Al Mansoori, reportedly joined market forecasters, who are looking forward to a $60 per barrel crude oil price by the end of 2016.

With crude oil demand in Europe, Asia and America and production in key oil fields supposedly moving more in line and thus balancing up, Al Mansoori like a few other experts believe that prices could before the end of the year, touch a $60/b mark months after it witnessed measured recovery.

“It’s possible for oil prices to reach $60 or more during this summer as demand increases in the U.S,” said Al Mansoori at a conference in Abu Dhabi last Monday.

He further stated: “We’ve always been incredibly bullish on oil. We expected supply to collapse. Demand is still very strong. I would expect oil prices to keep rising.”

Also finding resonance with Al Mansoori are the Bank of America and Standard Chartered estimating prices to hit the $60 mark even by the fourth quarter of 2016.

Sharing in Al Mansoori’s optimism was a global chief economist at Standard Chartered Plc, Mario Maratheftis, who contemplates that crude oil will end the year higher than $60/b in an interaction with the Bloomberg.

The Bloomberg reported that Maratheftis said crude was likely to go higher than $60.

Also on this, the Swedish financial group, SEB Bank said in its June investment outlook forecast that Brent crude could touch $60 this year.

The bank, in its forecast, explained with cautious optimism: “Our forecast is that oil prices will again be at around current levels – $50/barrel for Brent crude – toward the end of the year, but we see potential for higher prices during the summer and autumn, occasionally perhaps up to $60/barrel.”

Similarly, Bloomberg quoted the Bank of America Merrill Lynch (BofAML) to have estimated in its latest report that Brent will average $53/b in Q4 of 2016, and then rise to $61 in 2017.

The investment bank also forecast oil demand to touch its peak only after 2050, given that prices stay below $100.

“Any long-term oil demand projection rests on understanding transport demand, which today comprises 54 per cent of global oil consumption,” BofAML explained in the report.

It further said: “In our base case, we expect that growth in transport demand will continue to more than offset fuel efficiency gains and substitution to alternatives.”

This year alone, oil futures have jumped 31 per cent to climb above $50/b last week as crude stockpiles of the United States declined to further cut the supply glut.

In addition, robust demand in India and other emerging nations has also led the International Energy Agency (IEA) in May to reduce its estimate of the global oil surplus for the first half.

OPEC Excited with Price Movement

Oil has surged about 85 per cent since touching a 12-year low in February on signs that the global surplus could be easing, and the Organisation of Petroleum Exporting Countries (OPEC) which met on Thursday in Vienna has shown its excitement with the development.

But while forecasters agree that the supply glut is finally dwindling perhaps on OPEC’s adopted approach of pressuring high-cost suppliers to concede market shares was finally paying off, Venezuelan Energy Minister, Eulogio Del Pino, thinks otherwise.

Del Pino, who said in Vienna that the price recovery had more to do with unexpected outages than a successful OPEC strategy, described the unplanned disruption of crude oil production in Nigeria, Canada and Kuwait as the primary reasons for the recent price recovery in the global oil market.

He said the recent upward movement in prices of oil had more to do with unexpected supply disruptions in fields of some member countries, not from OPEC’s strategy.

According to him, unplanned disruptions in Nigeria, Canada, and Kuwait have been effective measures to cap crude oil production, and then forced a ‘de facto’ production freeze.

Notwithstanding Del Pino’s assertions, oil ministers of the OPEC had expressed delights that the oil market was currently moving in the right direction they had anticipated.

According to Bloomberg, the United Arab Emirates (UAE) minister for energy, Suhail Al Mazrouei, and Nigeria’s minister of state for petroleum resources, Dr. Ibe Kachikwu, had stated that the strategy of letting low prices eradicate surplus production was working.

“From the beginning of the year until now, the market has been correcting itself upward,” Al Mazrouei was quoted to have said, adding, “the market will fix itself to a price that is fair to the consumers and to the producers.”

He was then backed by Kachikwu who said: “I think the market trends are better now and the sense of urgency that spurred producers to mull an agreement to freeze production in April has dissipated.”

Kachikwu however noted: “While prices are moving in the right direction, I think it needs more acceleration of the pace,” Kachikwu said.

What is in it for Nigeria?

Despite the spirited and cheery price movement, Nigeria which had in the last months conceded its top Africa producer status to Angola due to renewed production disruptions in the Delta region, may not really benefit from this.

As at the last count, the country had lost considerable production volumes from the activities of new militant group, the Niger Delta Avenger. The group has kept up with their bombing of oil assets in the Delta to ensure that the country’s production dropped to about 1.1 million barrels per day.

This situation, industry analyst and former special adviser to the Minister of Energy, Dan Kunle, noted was not a good omen for the country’s economy which other economic experts said was on the brink of recession.

Kunle explained that the country is losing vital production volumes and as such losing huge revenue from the drop. He said the country might not benefit from the upsurge in price, which he added may last up till October when the summer period in the west is over.

“The Niger Delta issue is an issue of political economy and the government should treat it that way. It has to be taken holistically and addressed once and for all, not with the force the government is taking now,” said Kunle.

“Already, the country is losing huge production volumes and will not benefit from this rise in price if the issues are not addressed quickly. Right now, demand across Europe and Asia or America is high because people can drive their cars across places because there is no winter.

“This transport demand alone is contributing to fuelling supply and that is just the simple way to describe it but when it is winter and people no longer move around heavily, demands will drop and refineries will demand less of crude to refine, but until then, Nigeria needs to get through this renewed insurgency in the Delta before it can enjoy the fallouts from this new price,” added Kunle.