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Thursday, December 8, 2016

Oil will again be in short supply


Bank Goldman Sachs made a potentially important statement: analysts predict the return of a situation of shortage of oil. A number of factors now indicates problems with the fuel extraction and consumption growth. For how long will continue such a deficit and how will it affect oil prices?

One of the world’s largest investment banks Goldman Sachs for a long time predicted a further fall in oil prices. Now, however, he changed his mind: more than two-year period of oversupply of oil was replaced by a deficit.

“The situation in the oil market has probably changed in may due to persistently high demand and a sharp reduction in production

“The oil market has moved away from the overcrowding of the warehouses to a shortage much sooner than we expected”, – quotes Reuters the statement of Goldman Sachs. The situation in the oil market has probably changed in may due to persistently high demand and a sharp reduction in production.

Interestingly, this prediction contradicts the other, not less authoritative. Recently the International energy Agency announced the reduction of the oversupply in the oil market and higher growth in oil demand. But the IEA is no shortage waiting. According to Agency estimates, oil oversupply in the first half of 2016 will amount to 1.3 million barrels per day in the second half – a little less, to 1.1 million barrels per day.

At the same time Goldman Sachs experts expect the deficit in the April – June 2016 at the level of 71 thousand barrels per day and the deficit to 417 thousand barrels per day in the fourth quarter. And this is indeed a significant statement. What made the experts at Goldman Sachs so radically change their opinion? Bank experts pay attention to a decrease in supply of oil due to a series of supply disruptions from several countries on one side and on the demand growth on the other.

The reduced supply

So, in Nigeria, the company ExxonMobil has suspended supplies from one of the major fields in the country Qua Iboe. Other producers from Nigeria also faced problems in production. In the end, production in Nigeria fell to its lowest level in the past decade to 1.6 million barrels per day.

Venezuela is another country, which since the beginning of this year has reduced the volume of oil production by at least 188 thousand barrels per day due to critical difficulties amid growing instability of the national economy and the risk of default of the state oil company PDVSA.

Continues to decline and production in the United States, since the cost of shale production is higher than traditional. In favor of this indicates a further fall in the number of working units: according to data published on 13 may, it fell to 308 units, said Irina Rogova of GK ForexClub. Just this year, production in the US could shrink by 800 thousand barrels per day.

“The volume of supply has decreased due to a number of reasons: there are forest fires in Canada and a strike in Kuwait, and blocking ports in Libya, and pumping oil to Turkey from Kurdistan, and the activation of militants in Colombia and Nigeria, all together, according to calculations by Goldman Sachs, has deprived the market in time to 2.5 million barrels per day”, – said Vice-President of IFC Financial Center Stanislaw Werner.

Demand growth

Except for force majeure supply is expected to increase demand for oil, typical for this time of year. “In the United States begins the auto season, which increases the demand for gasoline and increases the load of the refinery. According to the same OPEC that an additional 1.2 million barrels per day”, – said Vice-President of IFC Financial Center. Goldman Sachs expects the demand growth at 1.4 million barrels per day in 2016 against the previously expected 1.2 million

“All of this is situational, but a number of factors can save your action to the end of the year, which will reduce global supply by 1 million barrels per day. Therefore, even increasing OPEC production by 474 thousand barrels per day did not lead to the suspension of the rise in oil prices in may,” explains Werner.

However, even at Goldman Sachs note that the peak deficits in the supply of oil will be in the fourth quarter of 2016, but in early 2017, the market will return to surplus. Because, firstly, by this time, be able to work around supply disruptions from several countries. Secondly, Iran and Iraq will increase production. Thirdly, Saudi Arabia, Kuwait, UAE and Russia will increase production.

How long will the trend change?

However, it is surprising that amid such strong statements Goldman Sachs Brent crude and WTI has increased in price by only 2% (Brent – to 48.86 per barrel, WTI – up to 47.2). Meanwhile, just last week oil quotations have grown on 10%.

Why oil is not the beginning of a sharp rise after such sensational statements about the beginning of the oil shortage on the market? Because the fact of the shortage yet, says the Deputy Director of analytical Department of “Alpari” Anna Kokoreva.

“Perhaps, insignificant deficit, but hardly for long, as the largest players in the market strive to increase production. Oversupply will tend to decrease in the coming years, but will remain,” – says Kokoreva.

“It is premature to talk about the lack of energy. According to the latest data from the EIA, the global market in April, the proposal still exceeds demand by 0.5 million barrels per day. Of course, this is much less than in March (1.45 million barrels), but the imbalance still persists. The current situation allows to believe that the imbalance will gradually disappear. But this is unlikely to happen as quickly as Goldman Sachs predicts,” agrees Irina Rogova of GK ForexClub.

There are still risks that the extra barrels will take demand, and OPEC can again increase its market share. “A change of oil Minister in Saudi Arabia and medium-term plans to increase production by Kuwait and Iraq say that is definitely not to be any talk of “freezing,” says Werner.

In addition to this, investors are afraid to continue to increase because of the risk of resumption of shale producers in the United States. “Despite the shaft of bankruptcies, many of the major players in the U.S. now get a chance to refinance and to hedge risks and thereby to continue his fight for life. Now we hear the talk about the fact that when you save a situation, some players ready to reactivate wells that do not require a lot of time” – does not preclude Werner.

That is why Goldman Sachs forecasts growth in oil prices is modest. The Bank raised the forecast price of WTI crude oil, but only 6-10 dollars. In the second quarter there waiting for 45 dollars per barrel (instead of 35 earlier), in the third quarter – $ 49 (instead of 40), fourth in 51 dollar (instead of 45) per barrel. The average price for North American oil in 2016 will amount to 44.6 per dollar (instead of the previously expected 38.4 per dollar), in 2017 – 52,5 per barrel, expect the experts of the Bank.

Predictions from Goldman Sachs prices are very close to reality, estimates Kokoreva. In her opinion, the Bank’s forecast is unlikely to have a long lasting effect, today this factor to be played “bulls” and during the week the market will influence the statistics on oil reserves in the United States, from the US dollar and the geopolitical situation.

As for Brent crude, a comfortable range until the June summit of OPEC and publish data on world supply and demand of energy in may can be 43-50 per barrel, said Rogova.

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