BLACK GOLD DANCES

We all follow the weather forecast at least two or three times a week so we can plan what to do and how we will relax on the weekends. Until recently purely economic news - whether it was about stock market rates, the price of oil or gold, or exchange rates - did not interest most people. Now the situation has changed completely - we continue to check the weather forecast a few times a week, but now we try to keep tabs on oil prices, exchange routes, and market forecasts every morning. 

The lowered cost of petroleum is already having a negative effect on many oil-producing countries, who have grown used to oil prices in the range of 100 dollars per barrel and have seen that value halved. 

Although Brent grade oil has stayed at 60 dollars at the London Exchange for the past few weeks, many experts consider that to be a temporary phenomenon. Analysts at Citibank say that the oil market will likely hit bottom at the juncture of the first and second quarters of this year. By then the cost of WTI grade oil on the New York exchange may decrease by "much more than 40 dollars" and for a certain time stay around 20 dollars. At the moment WTI grade oil costs around 50 dollars. 

Besides this, Citibank lowered its forecast for the average cost of Brent grade oil in 2015 from 63 dollars to 54 dollars per barrel, and for the year 2016 from 69 dollars to 68 dollars. For WTI grade oil the forecast for this year has been lowered from 55 dollars to 46 dollars, and for 2016 from 62 to 61 dollars. It's worth noting that two months ago, in mid-January, Brent only cost 45 dollars per barrel. The price increase to the current level is due to cold weather in the United States, which increased demand, and sandstorms in Iraq, which lowered extraction.

OPEC, the primary regulator of world oil prices, believes that the November decision to not reduce production levels in the face of low prices has proved to be the right one. According to a February forecast by the organization the demand for oil produced by OPEC in 2015 will be 29.2 million barrels - an increase of 400,000 barrels over the January forecast. That will be made possible thanks to decreased oil deliveries from other regions, and most of all by slowed growth in US oil extraction. From the very beginning everyone knew that shale oil extraction is not profitable when oil prices drop below 50-60 dollars. The drop in prices is having a gradual effect on drilling operations in the US - according to data from the American oilfield service company Baker Hughes, the number of drilling rigs worldwide is at its lowest level in five years. The decrease in drilling rigs is due to the US and Canada, the primary producers of shale oil, whereas in the rest of the world the number of rigs has either increased or stayed the same. According to data from the Energy Information Administration, as early as April 2015 the extraction of shale oil will stop increasing, while at a number of fields oil production will decrease overall.  

Although OPEC denies that it is in a price war with American shale oil, the results show who has the most to lose from low oil prices. According to OPEC's Secretary General Abdallah el-Badri, OPEC's decision to not reduce oil production quotas in November of last year struck a blow to shale oil extraction in the US. "When OPEC decided to not lower quotas, everything fell through for the American shale oil market," he said. These factors would seem to suggest that higher oil prices, or at least prices stable at the current level, are possible. The fundamental reasons for lowered oil prices are, however, still with us - oil production for the world market exceeds demand by 1.5 million barrels. What's more, the rate at which oil storage facilities are being filled worldwide is already creating a shortage of empty storage containers. In the US, for example, oil reserves are reaching an 80-year high. In the US 70 per cent of storage tanks in the US are full; in Europe that number reaches 90 per cent, while in Japan and South Korea it is at 80 per cent. And that is practically at winter's end, when reserves should be decreasing. Many experts predict that in order to free up reserve capacity, traders will increase sales, which in turn will cause prices to drop. If one adds in China's slowing growth and economic stagnation in Europe, which are far from good for demand, then the next six months will truly be dark days for the world oil market. 

Another sign of cheaper oil might be the signing of an agreement on Iran's nuclear program and a subsequent lifting of sanctions. According to Reuters, the six countries negotiating with Iran are already talking about submitting a resolution softening sanctions to the UN Security Council.

On the other hand, Bloomberg reports that Iran has already initiated talks with potential buyers of its oil in case sanctions are lifted. An agreement on Iran's nuclear program should be signed by the end of March 2015. If sanctions are lifted, Tehran could double its oil exports from their current level to 1.3 million barrels a day in short order.

All of the factors named above, combined with rising temperatures and the seasonal repair season for oil refineries world-wide, come together to lower the already low demand for oil and pull oil prices down. It is rather hard to predict how low oil will go, but far too many factors suggest that global prices will continue to fall - at least over the summer. 

However, even they bring their share of trouble, such prices also lay the foundation for a sizeable jump in the mid- and long-term.  Low oil prices are leading not only to the closure of shale oil projects, but also to less investment in traditional oil extraction. "Projects are being postponed. Investments are being reconsidered. Expenditures are being reduced," said the head of OPEC. "If there is no increase in deliveries, there will be a shortage, and prices will begin to increase again."

According to analysis company IHS, in 2014 new reserves of oil and gas totaling approximately 16 billion barrels of crude oil equivalent were discovered worldwide, which is the lowest total in 20 years. That figure fell for the fourth year in a row, which is the longest downward period since 1950.  In the past year not a single large oilfield with reserves of more than 500 million barrels of crude oil equivalent was discovered. Reduced oil exploration indicates that the situation with deliveries to world market might worsen, since fuel demand will increase in the future, notes The Financial Times. Since several years pass from initial exploration to the beginning of extraction, decreased reserves will affect deliveries after 2020. 

Of course, in the long term oil prices might increase even to 100 dollars per barrel, although that is not expected to happen in the next two years. In that case much will depend on demand - that is, on faster growth in Europe, China, India, and Southeast Asia. The shale oil factor will, however, continue to hang over the oil market for a long time. No matter how much the drilling of new oil wells of shale oil and gas decreases, technology enables producers to quickly renew and rapidly increase extraction at such projects. And that means that a growth in prices could be followed by another case of overproduction and lowered quotas. Developing technology might lead to increasingly lower costs for shale oil. That has to be taken into account.