Once we broke support a few months ago in the metals market, I began pointing to much lower levels b...
Stable Oil Prices? Not Much Longer
04/17/2013 7:00 am EST
Oil prices have been remarkably steady for the past three years. But the eerie silence is set to end, and the trend is downward, writes Robin Mills for The National.
For a commodity usually described as "volatile", Brent oil prices have been eerily stable over the past three years—averaging $111.26 in 2011, $111.57 in 2012, and $111.89 so far in 2013.
Despite the revolution in Libya, stringent sanctions on Iran, and Japan's nuclear shutdown, the oil market has remained remarkably steady. Yet on Friday, Brent oil prices fell sharply to under $102 per barrel, their lowest level for nine months.
The drop came in response to downgrades of global oil demand by the producers' and consumers' representatives: OPEC, the Energy Information Administration in the United States, and the International Energy Agency. They were particularly concerned about weak demand in Europe and Japan as the economic crisis drags on.
Is the current price too high? And are the oil exporters risking a repeat of the crashes of 1986 or 2008? Experience from the 1970s and 80s suggests that it is hard for high-cost non-OPEC supplies alone to trigger an oil price crash. But a price slump can be caused by a combination of swelling output outside the producers' organization, intra-OPEC competition in a scramble for markets, and a drawn-out fall in demand.
Saudi oil minister Ali Al Naimi has repeatedly described $100 as a "fair" price for both consumers and producers. But in 2001, he said $25 was fair; in 2004, $34; in 2008, $75 per barrel. The question is not fairness, but what price best balances short-term budgetary needs with long-term demand for Saudi oil.
Much is made of Saudi Arabia's supposed budgetary break-even price of about $90 per barrel. But what is often missed is that the target is a combination both of price and export volumes. Riyadh's budget can break even at $89 per barrel when the kingdom produces 9 million barrels per day (bpd), but if it has to cut back to 8 million bpd, it needs $103 per barrel.
The problem is that the current price makes oil exporters critically dependent on the continuing expansion of a few Asian consumers—China above all—and ensures a virtually stagnant market for OPEC's crude.
Meanwhile, there is growing interest in gas as a fuel for ships and cars. Non-OPEC producers, especially US shale oil and Canadian oil sands, also continue to grow strongly.
OPEC may think it can easily drive high-cost crude out of the market. But as technology and logistics improve, it is more likely that the unconventional oil revolution will be surprisingly robust, even if prices fall.
Australia, Argentina and Russia are candidates to be the next shale oil giant. Meanwhile, certain OPEC members—Libya, Nigeria, Iran—are suffering disruptions, making room for the others.
But Iraq above all, plus Libya, Kuwait, the UAE, and perhaps a post-Chávez Venezuela, all have plans for major growth. The Saudis, already uncomfortable with rising Iraqi production, have cut back their own output from about 10 million bpd in the middle of last year to just above 9 million bpd.
Greater supplies from Iraq have filled the gap left by Iranian exports—but further US moves to tighten the noose are met with evasion from the Iranians and their customers.
Oil prices' eerie calm may well persist during this year—Saudi Arabia still has room to cut back. The danger is less a price crash, more a prolonged slide. But at some point, Riyadh will weary of making room for its political adversaries in Baghdad.
For the major GCC producers with the luxury of long-term thinking, now may be time to coordinate on a more sustainable price—one that permits economic and demand growth, and warns off high-cost competitors.
That price might be $80 per barrel today—it will be lower tomorrow.
Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon. Read more from The National here...
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