The price of oil, between lows of the last 30 years and the prospect of recovery
- Written by Laurentiu Rosoiu
The stronger than ever pressure on sales and the prospects of their increase due to Iran’s entry on the market, after the lifting of international sanctions, feed the darkest scenarios in regard to the oil price.
There are several analyses showing that, if the current support level of USD 30 per barrel does not stand, oil could quickly collapse in search of new lows; and the thresholds of USD 20 or even USD 10/barrel (the level at which oil was traded for a period of time in early 1986 and also a minimum of the last 30 years!) are the next possible levels.
One of the opinions expressed in this regard is the one coming from Bob Dudley, BP’s CEO, in an interview after the talks between the representatives of the major players at the World Economic Forum in Davos this year. Regarded in a pessimistic note, the outlook is therefore not at all encouraging. Following the idea that ‘the solution to low prices are lower prices’, supported by several experts in the field, and in line with the OPEC decision in September 2014 (for maintaining the level of production, with the stated goal of removing from the market the producers from alternative oil blocks) - the price of oil could be, by every cent it is going down, closer to the end of the descending trend which started in mid 2014. Especially that, as until recently the media was dominated by the news, analyses and opinions preaching apocalypse of the oil market... lately the divergent opinions are more numerous, in support of the idea that oil does not have much room to go down, and the chances of stabilization and recovery are increasingly higher.
Among the supporters of the idea that the downward trend is close to an end (although the risk of reaching new minimums is quite high!) is the same Bob Dudley. He stated, in the same interview, that he expects the oil price to hit the lows later this summer and will return to growth given the higher oil demand coming from China and North America.
This is a prospect in contrast to the general trend (still extremely negativistic) which can be however supported with solid arguments, being in line with estimates from more than credible specialists such as Pierre Andurand, one of the few asset managers which correctly predicted the oil prices collapse (the fund managed by him registering gains of 240% on this trend), such as Alexey Ulyukayev - Russia’s Development Minister, or analysts with the large investment banks such as Goldman Sachs Group Inc.
And, beyond any technical argument, the fundamental arguments are extremely important. Thus, the evolution of global demand for oil over the last 30 years shows a sustained upward trend, despite several periods of economic turbulence; the consumption on the Chinese market is even less affected than global consumption. This trend is expected to continue: in ‘Oil Market Report’ of January 19, the International Energy Agency predicts that world oil demand will exceed the threshold of 95 million barrels/day in the second quarter (the highest level in the past 30 years); In this regard, unusually low temperatures at the end of 2015 and at the beginning of 2016 are likely to bring more veracity to this type of outlook. At the same time we have a growing number of bankruptcies among the players in the field of alternative deposits exploitation, particularly in North America, the main ‘culprits’ of triggering the current trend; this is the result, on one hand, of the price fall, which makes this type of exploitation less profitable and, secondly, because of Fed’s monetary tightening (meaning more expensive crediting), which makes it more difficult, financially speaking, to continue such activities. The paradigm in which the oil industry has operated over the last decade is therefore in an ongoing process of change! And the data show that an increasing demand and a diminishing supply mean that oil price recovery is closer to the moment when waiting turns into reality.