The Oil Drama

The Oil Drama

Heaps of oil analysis, bigger heaps of opinions and a flood of conclusions ranging from the possible to the impossible. It is beginning to seem as though everyone is blind, or running in a pitch-dark tunnel with no idea where the exit is. 

Some have concluded that OPEC’s production cuts have been successful, with 80-90% of its members adhering to their reduction quotas, while others also see it as a success, despite a 60% overall adherence! Success, to both those parties, means an oil price rise to the mid US$ 50’s per barrel.

On the opposite side, some consider that OPEC has failed, and its production cuts are unable to raise prices to the US$ 60’s level and beyond. But others see the mid US$ 50’s as a good level to take a rest and consolidate, before continuing its way up.

Then, there are the hard-core pessimists, who predict the inevitable crash of oil prices, sooner or later, towards the $ 30’s level. Those pessimists support their conclusions with the facts that oil demand remains weak and production remains high, as evidenced by the persistently huge inventory levels of crude and refined products. Each party produces the figures and numbers that support their arguments, and presents it in a very effective manner. For example, some pessimists point out that US oil production has increased 400,000 barrels per day in the past few months and is expected to increase another 80,000 barrels this March. Libya has increased its output by 100,000 bpd, and Nigeria is threatening to add some 500,000 bpd from production that was disrupted by terrorists. They also note that Russia has only cut 100,000 bpd from its promised 300,000 bpd. Not only that, but also, Russia and Saudi had jacked up their production to an all-time-high before OPEC’s agreement, and then reduced their levels from there, which weakens it impact on aggregate market supply. Now, Iraq seems to be unhappy with its quota, and is reported to be planning to raise the matter at OPEC’s next meeting.

Then suddenly, last week, the press reported that two major oil companies (Conoco-Phillips and Exon) have announced they had written off 4.7 Billion barrels of their Canadian in-the-ground reserves! Their justification was the unfeasibility of extracting it at the prevailing low prices, as well as New York stock exchange’s strict rules the impel them to do so. But was the timing of this decision now, a mere random occurrence? We have some doubts, especially as oil companies’ love to see rising oil prices, and by announcing such a huge write off while price stagnates in the mid 50’s, sends a psychological message that world oil supplies are shrinking. Oil traders and speculators survive on rumors and innuendo, and such news may trigger rallies that push prices up. The two oil companies are not seriously hurt by such write offs, as these are not part of their booked assets, but off-balance-sheet items that can be easily reinstated later, if prices rise or the companies determine that the cost of extraction has shrunk due to technical innovations. And to ease any reader’s worries, Exxon is still left with 20 billion barrels of reserves. Now, it would be interesting to see if any of the other oil companies follow suit and also write off a small part of their reserves, which could favor a price rise.

The implications of such write offs may also be positive for Saudi Aramco Company, which is presently undergoing a valuation process, prior to its planned IPO at the end of the year. A perception of shrinking world oil reserves could have a positive effect on the value of its reserves.

In short, it seems that everybody is grabbing any straws that keep them afloat amidst the waves of contradictory facts. Even such shrewd operators as Goldman Sachs have been issuing contradictory views every few weeks or months.

But because oil prices are affected, in the short term, by the temperament of the traders and speculators, rising with their optimism and falling with their pessimism, we shouldn’t be surprised by the unending gush of opinions – each price rise or fall means trading profits.

As for the longer term, the impact of rumors weakens and is replaced by more sober analysis, one of which is the presence of a strong resistance barrier around the US$ 70 which puts a lid on any rise, and ends the hope of again seeing astronomical oil revenues – unless major geopolitical disturbances occur. As for the very long term, the future seems bleak for oil and other hydrocarbons because of the serious trend to switch to renewables by 2050. The remaining question is: Have the oil producing countries begun to prepare themselves for their bleak future?

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