Oil hits 2015 high; shale threat to fizzle out

Oil prices reached 2015 high of $62.57 early this week, fueling optimism among several analysts that OPEC, led by Saudi Arabia, will remain a major force in the oil market despite a boom in US shale output.
Market sentiment has been bolstered in recent weeks by cuts in output by North American shale producers that have raised expectations of a reduction in the current supply glut, according to reports.
“Inventories should slowly erode over the next few months, eventually causing oil prices to move higher in $10 increment,” commented John Sfakianakis, Middle East director at Ashmore Group, reacting to gains made by the commodity this week.
His remarks came as Kuwait Oil Minister Ali Al-Omai said that oil prices have improved faster than expected.
“We will see better prices in the second part of 2015,” said the minister. A new report from BP also predicted an OPEC comeback.
“The market share of OPEC is likely to be roughly 40 per cent by 2035, similar to the average of the past 20 years,” said the BP report.
In its latest long-term energy outlook, BP also forecasts that rapid growth of so-called “tight” oil supplies, shale supplies, particularly in the US, until the end of the decade.
The pace of output growth, which has contributed to a collapse in oil prices, will then slow, however, paving the way for a recovery in the market share of Middle Eastern producers, it said.
Commenting further on current market dynamics, Sfakianakis told Arab News: “Oil prices have been exaggerated on the way down and analysts are trying to make sense of where oil prices will go from here on.”
He added: “Oil prices surprised on the way down, so one shouldn’t be surprised that there is a price recovery as it was unjustifiable the correction.”
Sfakianakis added: “There are upside risks and the second half of the year could see oil prices rising rather falling. Two things happen when oil prices drop so far so fast, particularly when the world has not really changed very much.”
He said: “First, demand for oil rises as consumers shift from non-oil energy sources towards oil generated energy. Second, output falls. Initially output may rise as companies seek to offset falling prices with more output, but few companies – and particularly not national oil companies – have capacity to dramatically step up production, particularly since capex is being slashed.”
After plumbing lows of close to $40 a barrel, international benchmark Brent North Sea crude for April delivery rallied to $61.19 last week.
The fall prompted regional economic experts and policy planners to reiterate the need for economic diversification in Saudi Arabia and Gulf states.
Oil prices have now staged a rebound from the lowest levels seen in almost six years amid signs that US production will decline in response to the market’s collapse.
According to Reuters, front-month April Brent crude was down 47 cents at $60.93 a barrel at 11:34 a.m. EST (1634 GMT) on Tuesday, off the intraday peak of $62.34. Brent reached a 2015 high of $62.57 on Monday.
US March crude was down $1.30 at $51.48 a barrel, having fallen as low as $50.81. March crude oil options expiration was slated for Tuesday ahead of Friday’s March contract expiration.
Mushtaq Ahmed, a senior financial analyst at Zughaibi & Kabbani Financial Consultants, Jeddah, commented: “Expansion in nonoil private sectors can be an effective strategy for GCC countries to diversify their economies and to offset huge losses due to oil deflation. Need is to attract foreign firms that may transform cheaper and sufficient raw materials like Aluminum and plastic etc. into finished products.”
There were predictions earlier that GCC countries might suffer budget deficits this year and some of them may be forced to borrow from Western financial markets.
“Oil prices should go up to $85 for GCC countries to have a balanced budget,” a report published by Bank of America pointed out.
Commenting on the issue, a regional economic analyst told Arab News: ”I suspect most countries will emphasize continuity. They have built up significant reserves and will wish to demonstrate their ongoing commitment to economic diversification and the infrastructure build-up. This is also important for confidence.”
He added: “However, this will be an opportunity to rationalize the fiscal system. The discussion about a regional VAT has been revived. Many subsidy regimes can be modified and will also boost economic efficiency.”
In a related development, BP Chief Executive Bob Dudley said on Tuesday that North Sea oil production will decline to around 500,000 barrels per day by 2035 as fields in the mature basin deplete.
“The North Sea is a very mature oil and gas province and it will inevitably go through a decline. It peaked in 1999 at around 2.9 millions barrels per day and our projections are that it will be half a million barrels in 2035,” Dudley said during the presentation of the BP Energy Outlook 2035.