killing from future sale at higher prices. However, their hopes were dashed overnight by Reuters reporting that “US oils tanks barely one-third full beckon crude contango play” – only 150M barrels of the total US storage capacity of 439M is currently occupied and represents the highest vacancy rate since 2010.
American Petroleum Institute reported on January 13 reported that US crude stocks had risen 3.9 million barrels the previous week. At that rate, it would take 18 months to fill the US capacity alone. So, where is the glut at a time when storage tanks are just one-third full and floating supertankers can still be leased at will?
According to the US Energy Information Administration, from 2013 to 2014, world production increased by just 1.8m barrels per day or two percent whilst consumption increased by 1m barrels per day. However, the overall surplus has remained almost constant at just over 2m barrels since 2012. For 2015, EIA revised downward the global demand by just 0.2 million bbl/d to an average of 92.3 million bbl/d. This is in sharp contrast to all the worlds analysts and forecasters suddenly blaming the slump in price on “A surprise surge in production and weaker than expected global demand for crude”. So, where is the surge in production and where is that weaker than expected global demand?
Despite being the most bearish on 2015 crude prices, Goldman Sachs has been playing ‘catch-up’ after predicting fundamentals pointing to a $90-$100 Brent Oil (in Jan 2014) to just $80 (end-Oct 2014) to $40 (12 Jan 2015) and still looking for the bottom of the barrel! According to another Goldman Sachs forecast, Crude has to “stay lower for longer” if investment in shale is to be curtailed to rebalance the global market. This also makes Opec’s ‘hands-off’ approach the most ‘hands-on’ approach possible in light of its end-November 2014 decision to maintain production levels that let the crude oil price crash to $66.
Opec’s inaction was reported by many as an immense political gamble to shake out the weakest shale producers in the North America. As late as last year, Opec was dismissing US shale as a ‘flash in the pan’ because it still believed that half of all US shale output was vulnerable below $80. In Oct 2014 Bernstein Research estimated that only about a third of US shale production would be uneconomical if oil prices to fell to $70-$80 per barrel. If the Opec inaction was to shake out the weakest shale producers in North America, their mission was already accomplished in November 2014. So why allow the prices to continue to fall toward $40 for what Opec considers to be a flash in the pan?
Perhaps Opec is looking at other factors. First, that breakeven oil price estimates for US Shale vary from as low as $24 to $90+ depending on the oil field. Analysts point to the fact that it is the “full cycle” cost for shale production that is $70 to $80 but the CAPEX required to bring on additional wells could be as low as the high-$30s.
Second, that many of the largest shale oil producers have already hedged most of their output for 2015 and in some cases also their output for 2016. In addition, a recent report found that only 1.6 percent of global oil supplies would be loss-making if crude prices fall to $40 a barrel, but even this level would not necessarily spark shutdowns. In that case, Opec’s political gamble to shake out the weakest shale producers in North America would need to continue for a good 18 months to two years to have any lasting impact even if the crude oil price fell to the high $30s. But surely Opec is aware of these facts and figures? So why allow the prices to continue to fall toward $40 or high$30s?
As implied in my December 24, 204 article, the answer lies in a statement hidden away in the ‘Asian Development Bank Outlook 2014 Update’ that reads: “The US and the European Union recently imposed sanctions on the Russian Federation designed to diminish the viability of its long-term production but sanctions have not yet affected oil prices”.
The hidden hands of governments are at play in a cold war that for some never ended and the crude oil price slump will continue until the objective has been achieved. Unless of course you prefer to believe that the whole oil world really did wake up one morning to “suddenly” discover that it had caused “a surprise surge in production” despite a “weaker than expected demand”. And the British Treasury really does monitor 22 ‘useless’ city and non-city forecasters – the same 22 world-renowned forecasters who as recently as May 2014 indicated a high, low and median oil price of $115.6, $85 and $103 respectively for 2015.
The lower oil price has gifted a window of opportunity for oil-importing countries, which needs to be exploited to significantly reduce inflationary pressures and improve current account and fiscal balances. However, an oil price recovery could well be as dramatic as the current slump and leave no space for complacency on the part of governments.
Economic planners will need to determine how much further the hidden hands will allow prices to fall, for how long, and how sudden and dramatic will be the next rise in prices when the agenda of hidden-hands has been achieved. The first reports of an imminent Russian credit rating downgrade to ‘junk’ have already been printed. The crude price is unlikely to drop below high $30s and the window of opportunity is unlikely to persist beyond 2015 because the current slump is not based on market fundamentals.
The writer is Sloan Fellow at theLondon Business School.
Email: skhan.sln2004london.edu