Crude Oil Prices: Why A Sustained Rebound May Still Be Further Ahead
Global crude oil prices have recovered somewhat ― even if tenuously ― from the lows of just a few weeks ago, but they are still only about 30% of their values for the same period two years ago.
While it is unclear just how long it will last, the low oil price regime has failed to bring any significant growth to the global economy and has left many producing companies struggling with dwindling revenues, even bankruptcy. In addition, the often-observed correlation between oil prices and share prices only adds to current market uncertainties.
The current low oil price regime is driven in the main, by a lingering oil imbalance ― excess of supply over demand ― and a sluggish global economy.
Oil Imbalance
Facing substantial loss of market share due to the tight oil boom (mainly U.S. shale oil and to some extent Canadian tar sands), major producing countries such as Saudi Arabia and Russia, which have lower production costs also turned on the spigots to their massive oil casks. The result has been the current supply overhang, which is being exacerbated by Iran’s insistence ― after her recent emergence from a restrictive sanctions regime ― on speedily attaining her pre-sanctions production level.
The global oil imbalance has been on an upward trajectory since 1Q 2014. It is informative that this positive imbalance is not driven by falling demand but by the growth in supply superseding that in demand. Unless this differential growth rate is properly addressed, that imbalance, and therefore the low oil price regime will linger.
Perhaps in recognition of this, a meeting of Organization of the Petroleum Exporting Countries, OPEC, and some other oil producing countries has been scheduled in Qatar, for 17 April. While the meeting was convened ostensibly to rebalance the global oil market, a consensus appears increasingly improbable, as ideological and other differences between two of OPEC’s largest producers have remained unresolved. Saudi Arabia has conditioned her participation in a production freeze on the commitment of Iran to the same. Iran has disavowed any such commitment and has instead, been ramping up output; the country’s oil minister recently reported that oil and gas condensate exports for the month of March exceeded two million bpd. In an even more unyielding stance, Bloomberg reports that for May deliveries to Asia, the country is offering her Forozan Blend crude oil grade at a discount to rival Saudi Arabia’s Arab Medium grade; and this after setting it at a premium for the last seven years.
Even in the event that an accord on a supply freeze is reached in Qatar, the sheer rate of current oil supply would necessitate a steeper demand growth rate than the current value, if that imbalance must be rapidly reduced.
Global Economy
Such demand growth rate is unlikely to be seen any time soon. Crude oil remains a dominant energy form used by the vast array of global processes and as such, low oil price regimes usually provide the spur for economic growth in energy intensive economies. However, the latest publication of the Brookings Institution-Financial Times TIGER ― Tracking Indices for the Global Economic Recovery ― index bears a gloomier outlook for the global economy. As reported by Financial Times:
The publication provides sober reading, highlighting sluggish capital investment, falling industrial production and declining business confidence ahead of the spring meetings of the IMF and World Bank this week.
China and other emerging economies accounted in the main, for most of the global economic growth after the 2008 financial crises. China is the world’s second-largest economy and the second-largest importer of goods and commercial services; any economic downturn in the country would significantly affect the global economy. As the country, a major oil consumer, transits from an emerging economy to a developed one, lower growth rates may become the new order.
With the current slump in commodity prices, other emerging economies that depend on commodities for a significant proportion of revenue have seen public coffers drained.
A strengthening of the U.S. dollar, the denominated currency for most of the commodities, compounds the debt burden.
All said, there may be periodic spurts in global oil prices ― such as was seen just last week on reports of a U.S. inventory drawdown, and which quickly fizzled out ― but a sustained recovery is most likely still further ahead.
Disclosure: None