OPEC loses temper: oil price rally begins

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Getty Images

The positive signals about a possible recovery in oil prices in 2016 began appearing on the global oil market this week for the first time over a long period of time.

The prices dropped to record levels over the last 13 years. The two heads of the major world oil companies, namely, BP and LUKOIL, have made the same statement with a difference of one day. They stated that the prices can increase by late 2016.

Robert Dudley, the head of UK’s BP, which is producing 3.2 million barrels of oil equivalent a day, said in an interview with BBC that the prices may reach $40 per barrel in the middle of 2016 and $50 by late 2016.

Vagit Alekperov, the head of the Russian LUKOIL company, controlling one percent of the world proven oil reserves, said that the prices will start increasing in July-December 2016, RIA Novosti reported.

The statement made by Khalid al-Falih, the head of the world largest oil producer – Saudi Aramco, can be also considered as a positive signal.

Khalid al-Falih has made a statement at the Davos economic forum this week, saying that the oil market prices have greatly dropped and will be inevitably increasing, Financial Times reported.

But the head of Saudi Aramco, controlling more than ten percent of the world oil market, added one important remark. He said that Saudi Arabia does not consider it right to cut oil production by OPEC members unilaterally.

Thus, Khalid al-Falih openly called the non-OPEC countries for the reduction of production. Nearly 60 percent of oil production – 56.77 million barrels per day will account for these countries in 2016. However, OPEC will produce 39.16 mbd. Nigerian oil minister Emmanuel Ibe Kachikwu supported the idea.

The Wall Street Journal reported that Kachikwu called OPEC members this week in Davos to hold a meeting to stabilize the global oil market and to exert maximum efforts for negotiation with independent producers, including Russia. Currently, the country mines an average of 10-11 million barrels of oil per day.

Nigerian oil minister, who is also OPEC’s president, already said in early January about a possible meeting of the OPEC oil cartel in March. How OPEC intends to take unanimous decisions that affect the world economy, and actually everyone on the planet, when two of its largest members – Iran and Saudi Arabia – are at the level of open conflict over Riyadh’s early January execution of a prominent Shia cleric Nimr al-Nimr?

His execution caused indignation of the Shia political and religious leaders and resulted in massive protests and attacks on Saudi Arabia’s representations in Tehran and Mashhad. After that Riyadh announced the severance of diplomatic relations with Tehran. Bahrain, Sudan and Djibouti also ceased diplomatic relations with Iran because of solidarity with Riyadh – one of the leaders of the Arab Sunni world.

OPEC, by the way, with the beginning of a low prices’ period – since September 2014 – held meetings much more frequently than when oil prices were much higher.

Any important decisions to stabilize the market were not made during these meetings. It has led to the fact that today Venezuela, Colombia and Ecuador, are forced to sell their oil for a price that is less than its production cost.

These South American countries, in total provide up to seven percent of the world oil supply. Venezuela, in particular, sells oil for $15 per barrel, and Colombia for $20-21 per barrel.

The desire of OPEC to hold negotiations with countries outside the cartel on ways to reduce production in order to restore oil prices is probably due to the fact that the cost of OPEC Reference Basket (ORB) has recently amounted to an average of $23 per barrel, which may not trouble Saudi Arabia but makes other members of the organization very concerned. It is obvious that all oil-producing countries that didn’t cut production even by one barrel since the beginning of the prices’ fall, are very worried about the current situation.

But no one wants to be the first one to increase prices, as its place will be immediately taken by a competitor for sure. With some degree of probability, one can assume that for a significant increase in oil prices, OPEC will unilaterally be able to reduce production only after the cartel waits until many US shale companies, the break-even level of which is significantly higher than this range, go bankrupt by keeping prices in the range of $25-$30. There are many such companies.

Namely this could potentially lead to reduce in exports of raw materials from the US during 2016. Last year, for example, because of low oil prices, more than 40 companies producing shale oil have stopped work in the US, despite the fact that the average spot price of West Texas Intermediate (WTI) crude oil in 2015 amounted to $48 per barrel on the terms of FOB (Free On Board).

In January 2016, the price of WTI fell by a third – to $32 per barrel. The US will increase imports with the reduction of exports, and expects a similar move from other major economy of China, which, according to various estimates, will begin to recover significantly since the end of the first half of 2016.

As of Jan. 22 morning, the March futures price for Brent reached $30.21 per barrel, WTI – $30.41 per barrel. The average spot price for Brent on FOB since early January was $30.36 per barrel, according to the EIA (US Energy Information Administration).

The maximum price for Brent this year – $36.28 per barrel – was observed on January 4, and the lowest – $25.99 per barrel – on January 20. Over the past 30 years, the maximum price of Brent reached $143.95 per barrel, which was observed in July 2008.

Article written by HEI contributor Vagif Sharifov, Editor in Chief, Trend News Agency.

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