Tough times ahead in the oil market: Ministry of Energy banks on a price of 50 dollars per barrel
- Written by Adrian Stoica
This foresight came about in elaborating the new energy strategy of Romania. In doing this, the Minister of Energy took into account the “Low Oil Price” scenario of the International Energy Agency (IEA), presented in the World Energy Outlook 2015 report. This report estimates that balance on the oil market will not be restored before 2020, with prices varying from USD 50-60 per barrel, followed by a slow and lengthy growth up to USD 85 per barrel in 2040.
Seeing that all the estimations from recent years turned out to be wrong, this could be simple speculation. In July 2015, when the quota had reached USD 115 per barrel, not even the bleakest prediction could have foreseen such a sudden and dramatic decrease of quota, even below USD 30. For the time being the market is flooded by oil, and this situation could very well continue, even though cutbacks of the major exporters are already visible. Everything depends on political negotiations. Saudi Arabia, Russia, Venezuela and Qatar have recently announced that they are open to keeping production at the same level as in January of this year. But this will be met only on condition that the other important exporters do the same. This decision was also popular among other exporting states from Africa, Latin America and the Persian Gulf.
But this suggestion was not well received in Tehran. Iran, which has recently been liberated from the embargo imposed by USA and the EU, is determined to recover the market share that was lost as a result of sanctions. They even went as far as requesting that other countries in OPEC lower their production to allow Iran to increase its own deliveries. Iran continues to state that it has the same goals for exportation: growing from 1.2 million barrels to 1.5 million barrels a day for this month and recovering a volume of export of 2 million barrels a day by the second half of this year. It seems that clear disagreements in OPEC prevent further assembly of the organization. Suhail Al Mazroui, United Arab Emirates Minister of Energy, stated that the meeting will only take place after all the producers commit against increasing production. He highlighted that the current price level will determine everyone to freeze their production and that stubbornness in this context is futile.
This also provoked a quick reaction by the markets. The announcement made by Saudi Arabia, Russia, Venezuela and Qatar had some serious repercussions. The West Texas Intermediate oil quota grew instantly by 65 cents or 1.9% reaching USD 34.4 per barrel, a quota unregistered since the fifth of January. Even Brent, the global oil reference, grew to 24 cents or 0.7%. It’s all up in the air for the moment. If the level of production is not frozen, it’s likely that the markets will react as quickly, but in reverse.
The price of natural gas has also registered a decrease. A document published by the Ministry of Energy, regarding the next energy strategy, clearly shows that in USA, coal energy has been taken off the market by the extremely cheap shale gas, and the American coal is now exported towards Western Europe, where it has now replaced natural gas on the market. In addition to this, the drop of oil price is now producing a domino effect that is extending to the profitability of investments in renewable sources of energy (SRE) and in energy efficiency. Furthermore, the global oil and gas industry is confronted, at the moment, by operational or financial difficulties, and smaller companies are in danger of bankruptcy. In USA, for example, 35 production and exploration companies have filed for insolvency in the July 2014 - December 2015 timeframe, according to a Deloitte report. The financial situation of players in this sector is also underlined by a report from Standard & Poor’s. It shows that the energy sector covers about 31% of 285 billion dollars, the total amount of the damaged credits from USA. Despite all this, the American Government is opposed to the solution from Saudi Arabia, Russia, Venezuela and Qatar. USA is still a supporter of Iran but for altogether different reasons.