Commodity

Oil price in 2016: Lower than 2015 level

Hello, this is my first article in 2016. And, it is first time in English. I’m sorry for any grammatical error  in this article. I hope all of the readers who read this can help me with my english. Or, we can have a good discussion related to this article.

Enjoy…!

World oil prices declined significantly since the middle of 2014. At the close of first half of 2014, Brent crude oil price still stands at USD 112.4 per barrel. But, at the closing of 2014, Brent crude oil prices has touched USD 57.3 per barrel which is have dropped by 49% only in 6 months. In 2015, oil price certainly leaves its USD 100 trading level and remained depressed. Oil price traded in range USD 36.1 – USD 67.8 only, with opening price USD 56.4 and closing price is USD 37.3. In beginning of 2016, the sign from end of depressing oil price is not seen yet. Oil price traded in range USD 28.55 – 37.22 at first 3 weeks in 2016, which mean that price level has back to 2003 level.

Oil Price
Source: Bloomberg

If we see fundamental of supply and demand from global oil market, demand side has showing a positive growth in 2014 and 2015.  In 2014,  global oil consumption growth reach 1.47% and this growth is repeated with only little increase at 2015 to 1.51%. But, the main cause of declining of oil price are the supply side problem. If we see the global oil supply growth for 2 consecutive periods in 2014 and 2015, it reach 2.6% per year which is far higher than demand side growth. EIA data showed that since beginning of 2014, quarterly global oil production always exceeding its consumption. This condition is consistently occur up to 4th quarter in 2015.

World Oil Supply and Demand Development

World Oil Supply Demand
Source: EIA

The source of this oversupply condition is driven by the increasing production of non-OPEC oil producer especially United States. If we see the average yoy growth of US oil production since 2009 is reaching 8.6%, far higher than average of global oil production yoy growth that only reach 1.7%. This figures also confirmed by the increasing of US oil production shares in world oil production where in first quarter of 2008, US oil production shares only 10.1% of world oil production. But if we see same indicator in 2015, US oil production has grow significantly to 15.7% of world oil production. If we see the number of production, this shale oil and shale gas revolution in the US be able to increase the country production nearly twice that is 8.6 million barrel per day in 1st quarter in 2008 to 15 million barrel in 4th quarter in 2015.

United States Oil Supply Development

US Oil Supply Development
Source: EIA

This oversupply condition is aggravated by OPEC (Organization of Petroleum Exporting Countries) which is refuse to control their oil production level in order to reduce oversupply condition. OPEC currently is a cartel producer and controls 42% of world oil production so that the organization has huge power to control the world oil production. But, its power is not used by OPEC to control its production and the implication is world oil price drop significantly like we see recently. Moreover, OPEC is deliberately increase their production with an argument to maintain their market share in global market. When average of crude oil price start to declining in the mid of 2014, OPEC oil production growth on the contrary is increasing. In first half of 2014, average monthly yoy growth of OPEC oil production is -1.4%. However, in the second half of 2014 when oil price start to declines, average of monthly yoy OPEC oil production growth is increasing 1% otherwise. Same story in 2015 where oil price keep depressed with average growth -45.8%, the average growth of OPEC oil production still increasing to 2.8%.

OPEC Oil Supply Development

OPEC Oil Supply Development
Source: EIA

 

2016: Lower than 2015 level.

In the first three weeks in 2016, it’s seen that oil traded at USD 28.55 – 37.22 per barrel. With the average of oil price in 2015 is USD 53.6 per barrel, it is projected that average of oil price in 2016 will be below from its 2015 level and in range of USD 30 – 40 per barrel. From the supply side, the bearish factor for oil price in 2016 are OPEC is predicted keep its policy to mantain their market share and still flooding the oil market. Moreover, lifted sanctions on Iran is predicted will increase OPEC oil supply to the market. Iran plans to increase their production capacity up to 500 thousand barrel per day in 2016. This condition is confirmed by EIA prediction that projecting OPEC oil supply will surpassing highest level in 5-years with OPEC production reaching 32.6 million barrel per day in 2016.

Another bearish factors are from demand side. Global oil demand overshadowed by weakening of world economic growth especially from emerging countries. China which was a booster for world economic growth in 2005 to 2008 is projected will experiencing slower growth in 2015 – 2020. In 2005 – 2008, China can grow averagely 12% per year so that global economic growth can reach 4.8% in that period. In 2015 – 2020, China is projected only grow at 6.3% in average per year so that the global economic growth will grow only 3.8%, slower than 2005 – 2008 period.  Slower global economic growth surely have an adverse impact to the global oil consumption.

However, with the decreases of oil price to USD 30 level, it is predicted oil production will decreasing slowly especially from high-cost producing countries like shale oil in US and Canada. This will be a bullish factor for oil price but not in short-term horizons. If we see the break-even price of oil price in United States (price that considered by investor when deciding investment for increasing production capacity), current price are already below the break-even price level so that it is expected new investment to increase production capacity will significantly drop. Current investment most likely will be directed to maintaining current oil production level with existing oil wells which is the cost are cheaper than drilling a new development well to increase oil production. This condition is expected by the decrease of oil rig utilization data in United States. The impact of no investment to increase oil production capacity currently are oil production will decrease slowly because of the natural decline rate from current oil well. Also, the another impact is inventory of oil that previously build-up and reach a record level will decrease slowly.  Therefore, it is projected that oil production surplus in 2016 will drop significantly in the late of 2016, surplus of production and high level of inventory will diminish and will pushing oil price up in average in 2017 compared to 2016.

 

I hope i can finish the next article related to this about low oil prices impact to Indonesia. 

Regards

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