Bob Dudley, Group Chief Executive and a director of BP, predicted that the oil price will rise in the second half of the year as demand increases from America and China and supply begins to ease as the US shuts down production. “The fundamentals of demand are definitely increasing, demand for gasoline in North America, Chinese demand, Indian demand, it’s going up. And this [supply and demand] will get back into balance,” he said.
According to the U.S. Energy Information Administration, global oil consumption of petroleum and liquid fuels in 2015 grew by 1.3 million barrels per day and estimates that it will grow by 1.1 million b/d in 2016. The EIA also predicts U.S. supply will fall 700,000 b/d to 8.7 million b/d in 2016. Rising consumption and falling U.S. supply will help bring the oil market, which was oversupplied by 1.8 million barrels per day in Q3 2015, back into balance. This balance that will push oil prices up is also apparent by events playing out around the world. The global players that impact the price of crude oil are China, India and Africa who play a large part in demand, and Russia, Saudi Arabia and the U.S. who highly influence supply. Current developments in these countries are driving the growth and the re-balance of the crude oil market is beginning to occur.
China’s economy is still growing.
Despite concerns about the slowdown in the Chinese economy, their crude oil imports rose to a record level in February 2016. The Chinese government also set the GDP target growth at a range of 6.5 – 7% for this year. Chinese Premier Li Keqiang said earlier this month at the 12th National People’s Congress meeting that their target growth rate is aligned with China’s goal of completing the building of a moderately prosperous society and takes into consideration the need to advance structural reform. China’s economy is not as good as it once was but it is still growing, just not as fast. It’s also important to realize that based on global demand growth rates, China’s impact on price is 10-20% of the drop at most.
India has high demand.
India grew faster than China did in 2015. They’re also the fastest growing major economy in the world with 2015 GDP growth of 7.5%. India’s thirst for crude oil has recently been growing by ~5%/year, i.e. 200,000 bbl/d and as much as 9% last year. Determined to be a manufacturing hub like China, their demand for energy will only push the price of crude oil upward.
Africa is developing fast.
Africa’s current oil demand is growing at an annual clip of ~4% with population rising to over two billion people by 2040. Six of the fastest growing esconomies hail from Africa ranging in annual GDP growth from 7% to 8.7%. These countries are already seeing tremendous growth and we expect to see a sizable increase in consumption and storage in these countries moving forward. Their rapid growth is expected to push up the price of crude oil in the long run.
Saudi Arabia remains constant.
We know that Saudi Arabia won’t be cutting production anytime soon but it’s evident they won’t be producing more oil than they did last year. This is because the Saudis are not making enough revenue from oil to support their economy. With oil revenues supporting over 50% of the economy, they’re falling short by about $20 Billion every month. To help stem the bleeding of cash, the government has moved to cut certain subsidies. For the balance, the country must dip into its foreign reserves to meet its budget obligations. As of November 2015, the IMF reported Saudi Arabia’s foreign reserves to be approximately $635B; of which approximately $423B were liquid and easily accessible. Based on these numbers, Saudi Arabia could go insolvent or bankrupt between late 2017 and mid-2018. They can’t afford to produce more oil.
Russian turmoil forcing cutbacks.
Russia is battling many hardships including 12% inflation, GDP decline of about 4%, 10% decline in average incomes, and western sanctions. President Putin also continues to fund the Assad regime fighting the war in Syria against Saudi backed rebels and ISIS. Their enormous expenses require $105/bbl to balance their budgets. With oil revenues supporting about 35% of the economy, the Russians are also losing about $20 Billion every month. The country can no longer afford to raise debt and will be forced to work with other producers to slow down production.
The United States is cutting production.
The US shale industry has proved resilient in the face of low prices. According to Wood Mackenzie, average shale break even costs have dropped from $70+/bbl to $50/bbl. Many companies are cash flow positive at $40/bbl and these numbers are expected to drop as technology evolves and efficiencies are uncovered. However, US producers must continue to fight hard to cover their operating expenses and interest payments and have already decreased production to stay afloat. EIA expects U.S. crude oil production to decline from 9.1 million b/d in the first quarter of 2016 to an average of 8.0 million b/d in the third quarter of 2017. Production of 8.0 million b/d would be 1.7 million b/d below the April 2015 level, which was the highest monthly production since April 1971.
The effects of low crude oil price are playing their harsh toll on all global markets and the price is already rising. Based on these current events, forecast your own scenarios with this free forecasting tool from Seven Lakes: http://go.sevenlakes.com/Forecaster.html
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