Oil prices will not go up soon. Or will they?

The expectations related to higher oil prices on the international market during more than half of 2017 have not been met. The oil barrel is still fluctuating around USD 50 and the current developments are not encouraging for the investors waiting for a rebound. Thus, many analysts say it is very likely that the oil price would have on medium term the top ceiling at USD 55 per barrel and the bottom level at USD 45 per barrel. If OPEC and Russia keep to the deal to maintain the output capping, the variation will come from the same US frackers, the swing producers which would add or reduce supply to the world market. The scenario is well known: as oil price goes up, the US frackers increase production, when it drops the output decreases, leading to higher prices and they resume production again. It seems this development will be working for some time.
However, new evolutions add to this one. On one hand, the US frackers have made huge technological steps ahead and some say they could soon be efficient with oil prices of USD 20 or even USD 10 per barrel. This, combined with the reopening of 50-60 years old wells could be decisive. Then, Russia is in the pre-election year and has increased social spending by 6%. This means it might need extra-money to spend on social issues to keep the electorate satisfied and vote once more, next year, for Vladimir Putin as president. Last but not least, Saudi Arabia is said to envisage keeping to the oil output cuts further on, whereas rumours about its diminished reserves are going around. So, what’s to come out of these?

WORLD AND US MARKET DEVELOPMENTS

Specialists have reached the conclusion that the long-term average oil price at USD 65 per barrel is too high. Citi has changed the forecast downwards to USD 55 per barrel, due to the developments mentioned above, i.e. productivity gains of the US onshore exploitations that would boost the output. Almost concomitantly, JP Morgan/Ord Minnett reached the same conclusion, cutting the long-term forecast from USD 60 to USD 55 per barrel.
A US specialist is betting on the shale oil and sees OPEC running out of options when it comes to influencing world prices. Now, a different development is noticed, due to new technologies, the US oil producers have begun reopening oil wells closed down for decades. Considered inefficient at the time, now they have become profitable. On the other hand, reopening an old well involves costs of less than USD 1 million, as compared to opening a new well which involves costs of USD 6-8 million. Moreover, at the old well’s sites the facilities are there: pipelines and storage facilities. We are talking about wells which were operational in the 1980s. Thus, new technologies and other costs - leases, transportation and so on - lead to overall costs of about USD 15 per barrel. So, the calculation by one of the specialists goes like that: crude sells at USD 40 per barrel and the costs amount to less than USD 20 per barrel, i.e. a 100% return of investments. If the oil price goes up, then the profit is even higher. And it seems the investments would pay off in less than one year or even reach 100% profits.
Some go as far as anticipating the end of OPEC rule on the oil market, as it faces tough dilemmas.

RUSSIA AND SAUDI ARABIA, ALLIES FOR NOW

Russia and Saudi Arabia are expected to keep to the deal agreed in late 2016 and extended in May 2017 to limit the output in view of seeing world oil prices rise. And yet, their interests are beginning to go astray, as Russia is preparing for the presidential election next year. Things are looking better this year, after the poor economic performance last year. “For the first half of 2017, revenues were up 16% y/y in nominal rubles. Revenues from oil & gas taxes rose by 37% from the lows of 1H16, while other budget revenues increased by nearly 12% (well above Russia’s 4.4% inflation rate). Even if growth in revenues from excise taxes and corporate profit taxes slowed in the spring, both revenue items in the first half of the year were nearly 20% higher than in 1H16,” latest statistics reveal. This means more money for social expenditures ahead of the election campaign coming from excise duties, as said and higher oil output. In June, Russia’s oil production reached 10.18 million barrels per day, outpacing Saudi Arabia by 2.3% (9.95 million barrels per day). The share of oil exports in Russia’s total exports volume increased from 25.4% to 27.3% this year, against the same period last year. The federal budget revenues rose by over 20% year on year in H1 due to higher oil and gas tax earnings. An example of Moscow’s shift in intention to spend public money is the change in budgetary focus, with defence cuts of 8% and higher budget spending by 6%, whereas social spending increased by no less than 10%. The electorate should be happy when voting to re-elect President Vladimir Putin, shouldn’t it? The latest poll from the independent researcher Levada Center shows that Putin’s popularity is up 2 percentage points to 83%.
While Moscow is facing the need of higher revenues for 2018, Saudi Arabia seems to be more inclined to stick to the output capping. Saudi Oil Minister Khalid al-Falih has recently claimed that OPEC and its non-OPEC partners have not closed the door to the possibility of extending the production cut agreement, although the organisation reported for July an increased production by 172,600 barrels per day. “The possibility of continued production cuts is on the table, and the door to extension of reduction has not been closed. If further actions are needed by the market, whether to extend or change production levels, they will be examined on time and agreed through 24 countries,” the Saudi minister said. Saudi Arabia, however, will not take unilateral actions and will seek consensus among all parties concerned, OPEC sources say. “It is too early to predict what will happen following the first quarter of next year,” al-Falih added.
On the other hand, western sources say a significant share of Saudi Arabia’s oil resources are running out, mainly from the Ghawar Field, and that its countrywide reserves might be only one third of the assessed level, a fact that would have important impact on world oil markets and would lead to higher world prices. The analyst revealing this variant says “the country increased oil reserves by 100 billion barrels from 170 billion barrels in 1987 to almost 270 billion barrels by 1989. Since then, the country’s reserves have remained unchanged despite the fact that Saudi Arabia has produced almost 100 billion barrels of reserves since then. And looking at the details, most of the country’s significant oil discoveries were made from 1936-70 and no significant discoveries have been reported since then. Looking at a worst-case scenario, and removing both the country’s increase in reserves from 1987-1989 along with the country’s production since then, and Saudi Arabia might only have 70 billion barrels of oil left. That remaining oil, in the present environment, would last just 19 years.”
In support if this prospect, the author says Saudi Arabia has recently announced an ambitious ‘Vision 2030’ plan to diversify the economy besides oil, with huge investments to boost tourism and other forms of investing.
Drawing the line among all these information and non-confirmed stories, there is room for speculations. Some of them support the alternative of a trend of lower oil prices on the international market, others on the contrary, support an upward trend. Will the shale oil output prevail and definitely change the market? Will other developments overcome the US frackers’ enthusiasm? 2018 might bring surprises, for the time being 2017 most likely will keep the current trend of stability.

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