Friday, 21 October 2016

The curious case of oil

In Oil & Companies News 21/10/2016

There’s been a not-so secret war brewing over the last few years. A war between a loosely knit group of nations that have been the status quo in their space over the last 60 or so years, and a resurgent upstart that was once the former’s largest customer. I’m talking, of course, about the oil war between the Organization of Petroleum Exporting Countries (OPEC) and the US, and the wild ride they’ve taken oil markets on over the last few years.
OPEC members are widely expected to agree to cut output when they meet in Vienna on Nov. 30, marking the end of a two-year policy to keep the crude flowing, preserve market share and push the US shale oil producers out. It worked at the start, as supply surged, American oil rigs shut their taps, and prices dropped from well over $80 dollars a barrel to as low as $28 in the span of just 15 months. While great for pump prices at the local gas station, the drop saw many global oil companies go through rounds of excruciating layoffs, nations such as Venezuela and even Saudi Arabia struggle to keep national budgets afloat, and even overseas Filipino workers (OFWs) in the Middle East facing the distinct possibility of losing their jobs.
News late last month that OPEC and Russia not only agreed to freeze output, but to cut it as well, was welcome news for the beleaguered commodity space, and Brent crude firmed its position above $50 a barrel, a price level it flirted with since talks of an output freeze began in April. Although some analysts believe that oil could rise to $70 a barrel by next year, news of OPEC members such as Iraq, Venezuela, and Libya reporting higher than expected output levels and Iran’s move to ramp up production to pre-2006 sanction levels of 4 million barrels a day could dent the production cut’s effect on curving the oil slump.
On top of that, a funny thing happened as oil began to approach $50 on these production cut talks. See, as soon as oil got within a sniff of $50, US rigs started coming back online, as if stateside drillers woke up one morning, saw the trend, and began opening the taps. In fact, since June, when Brent crude began flirting with the $50 level, we saw a surge in active US rigs, nowhere near its October peak, but rising for 18 of the last 20 weeks.
The tricky thing about balance is that if too many rigs come online at the same time, and if production rises too fast in the US, we could see oil markets trapped in an endless loop of rising prices triggering increased output, which then lowers oil, and then sees producers in a mad scramble to close unprofitable oil wells and rigs, only to see prices rise to a point, restarting the cycle all over again. And it seems to really hinge around that $50-level, which could see the market trapped below $55.
Oil rigs in the US, though growing in number, are keeping a watchful eye on this, with oil production in the US rising minimally to just under 8.5 million barrels a day. Any sudden uptick in production, and the rally could come crashing down.
You might think, as a consumer, that it shouldn’t really matter to an oil-importing nation like the Philippines, as lower pump prices should mean more residual income for your average Filipino to pour into the economy. But, consider this.
More than 8,000 OFWs have lost their jobs in Saudi Arabia this year, as per the DFA’s estimates, with some reported stranded and living off scraps and leftovers in supermarkets across the gulf nation. Companies in the Middle East from Doha to Dammam have been feeling the pinch from lower oil prices, and many of the first to go are migrant Filipino workers. If the oil market continues to have a hard time making up its mind, we could see more retrenchments affecting almost 1 million Filipino workers in the Middle East. It’s no wonder, then, that the World Bank foreshadows that remittances in 2016 may grow at its slowest pace in 10 years, affecting one of the main legs on which the economy stands on.
The volatile nature of the oil markets and its inability to make up its mind may seem worlds away, making itself only felt in how much we’re paying for gas this week. But the implications of a low oil environment, and its uncertain trajectory long term, may reach farther than we might dare to imagine.
JP Ong is an anchor and associate producer at Bloomberg TV Philippines.

Source: Business World