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Thursday, 22 October 12:48 (GMT -05:00)



Stock and commodities markets

Don't Dream About Oil Renaissance, Shelin Says


While watching oil prices grow a little bit, oil exporters start hoping that oil prices will recover to the levels the used to be in the past. However, Russian market observer Sergey Shelin thinks that, given the existing state of affairs around the globe, this can only be possible in a dangerous world.
 

 

 

 

In one of his articles, he says that Russia and other economies dependent on the export of crude oil are dreaming about $100 per barrel – the price they used to enjoy a couple of years ago. Yet, Russian and some other media keep on publishing positive forecasts and saying that the end of the American shale oil industry is near, especially as investors are supposedly reluctant to continue investing money in energy carriers without a future.
 

 

NordFX analysts report that oil prices have been recovering for a while, driven by a number of factors.

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At the same time those who believe in higher oil prices (pro-Putin analysts in particular) say that the current price level of $58/b is one of the signs indicating that an oil renaissance is coming. At the same time, having analyzed last year’s market picture, we can definitely say that the highest oil prices of the year were seen in June 2016, and the rally was driven by a decline in the American shale oil production. The thing is, when the price was around $30/b, most of the shale oil production in the USA got unprofitable. Back then, Russian experts predicted that no investor would ever invest in the U.S. shale oil industry again.
 
However, in the second half of 2016, the American shale oil industry revived and started growing again. Later on, the so-called OPEC+ agreement was signed, which made Brent oil go up in price. History shows that the American shale oil industry influences the entire global market of crude oil much more seriously that any agreement between major oil exporters.
 
The OPEC+ agreement is still active, and the participants seem to follow it. At the same time, American shale oil companies have been pumping more and more oil up until recently. The thing is that natural disasters made oil refineries suspend most of their refining capacities. Apparently, this pushed oil prices slightly higher. However, those pro-Putin experts caught at the chances and started predicting an oil renaissance. This month alone, oil prices have gone up by 10% to $58/b.
 
They say that thanks to OPEC+ suspended the downtrend, and this let oil producers make extra billions of dollars. However, we cannot say that oil prices have been growing a lot since then. It would be more correct to say that the prices have been fluctuating around the level barely profitable for shale oil producers.
 
The expert says that a major price rally in the global market of crude oil is possible only if the world is in big trouble. Well, the prices could and did change by $10/b or more thanks to the big-scale OPEC+ agreement designed to cap oil production.
 
Under such circumstances American oil production could have continued declining slowly but surely as the conventional oil exporters could have enjoyed their unbeatable status. However, in this case oil prices would have been lower but the negative impact could have been partially made up for by higher supply.
 
However, the Vienna Accord (OPEC+) indicated that the old-school oil exporters had retreated from the global market. Apparently, the spare market share was immediately occupied by new-school oil exporters like American shale oil companies.
 
At this point, the USA has turned into a major oil exporter. China has been the biggest consumer of American oil this year. Mr. Shelin reminds us that crude oil is the only Russian product China is really interested in. Under such circumstances, the conventional oil exporters like Russia has been losing their market share and their outlets this year.  Oil in all, by September 2017, the American export of crude oil had already boosted all the way up to 2 million barrels a day. This is still 2,5 and 3,5 as little as the export of Russia and Saudi Arabia respectively.  At this point, the USA is the 7th biggest exporter of crude oil in the world – between Venezuela (above) and Iran (below).
 
Up until recently, the market situation has been unfavorable for the participants of the OPEC+ agreement. The 10% price rally and the oil agreement can be either a short-term victory or a long-term renaissance. If this is all about hurricanes, this is going to be a short-term victory. At the same time, we should keep in mind that several new factors have come into play now.
 
There is a threat of the nuclear agreement between Iran and the Western world to be disrupted. For those of you who don’t know, Iran is a major exporter of crude oil. The situation in the Korean peninsula has escalated as well. These and some other factors is raising concerns among international traders and investors, which in turn is pushing oil prices higher.
 

 

Anyways, despite all the dreams and efforts made by the OPEC and their partners, oil prices haven’t gone above $60/b yet. This means, that much serious concerns and much worse situation around the world are need to push oil prices closer to $100/b. That’s why there is no reason to dream about higher oil prices if the world is fine.

 

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