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Oil market boosted as OPEC sees light at end of the tunnel

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Investments in major projects are being reduced

The oil market got a boost at the close of the week and prices rallied.

Geopolitical unrest remain a concern and in early trading on Friday, Brent crude was priced around US$54 with WTI holding above US$50 a barrel.

The US Federal Reserve has indicated it may be willing to hold interest rates at current levels for a while longer.

In recent months the general feeling was for a rate hike by the end of this year but the minutes from the Fed meeting suggest more policymakers are in support of the status quo.

This gave confidence to traders and investors and supported equity and commodity markets.

The OPEC Secretary-General Abdalla el-Badri said the organisation saw “light at the end of the tunnel” and a return to fairer prices.

He cautioned that global investments in major projects are being reduced around the world at a rate of more than 22 percent this year.

This will mean lower supply on the market that will ultimately mean a return to a higher price. He was also optimistic about demand as the lower oil price environment is helping non-oil business grow and increasing consumer demand by 1.3 million barrels next year.

The head of the International Energy Agency, Fatih Birol agrees and said he sees investment falling by around 20% in 2015. This will be a blow to the industry making it “the highest drop in history.”

Both industry leaders were talking at the Oil and Money conference in London this week.

History could be about to repeat itself.

Underinvestment is always a concern for the market and Manouchehr Takin, former lead analyst with the Centre for Global Energy Studies in London said when the oil price collapsed in 1998, “this led to five years of under- investment in world upstream and slow growth of supply.”

Speaking at the Seatrade conference in Abu Dhabi this week, he said that OPEC will continue to produce, but questioned how much longer Saudi Arabia can continue its oil policy in a low price environment where its economy must be suffering.

“In August, Saudi government sold US$5.3 billion of bonds to cover its deficit and it plans to repeat this every month till the end of the year, making that US$27 billion.”

While the market is expecting some rise in price in the coming year, the PIRA Energy Group is more optimistic, forecasting that Brent crude will be back at US$70 by the end of 2016 and will trade around US$75 in 2017.

The chairman of PIRA Gary Ross said that one of the key factors for rising prices would be the lack of spare production capacity as demand continues to rise. He also said that the policy of Saudi Arabia was working and taking higher cost American production off the market.

Even if some of this production was to come back, Ross said it would take about nine months. By then, he’s confident demand will be rising. Not everyone agrees with Ross and Goldman Sachs maintained its gloomy outlook this week, saying the recent rally in prices will fade because of weak fundamentals.

American production has been on the decline, falling by around 600,000 barrels a day since March.

According to the Energy Information Agency, US output is expected to decline to an average of 8.6 million barrels a day, down from an average of 9.2 million barrels 2015. 

American commercial crude inventories increased by more than 3 million barrels last week, maintaining a total inventory of 461 million barrels.

The commercial crude inventory remains near record levels not seen in the past 80 years.

A weaker dollar and Russia’s involvement in Syria will also continue to strengthen the oil price in the short term.

In the longer term, sustained growth in demand coupled with falling supply will be the main factors necessary to re-stabilise the market. 

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