Oil prices to return to higher levels after Q1 2015

The oil price unsurprisingly fell after the Opec meeting concluded yesterday and has come down towards the level that I thought in yesterdays blog it should with no production cuts. Indeed there is no reason why in the short term the price cannot fall a bit further, after all there is no specific base here.

I think it is worth taking a look at the Saudi position in all this and make no mistake this is a proper old fashioned Saudi coup that Sheikh Yamani would have been proud of. They have done this because they can and they felt that the alternative option of cutting production just wouldnt work. I have said a number of times recently that trying to assess country’s budgetary equilibrium or cost base is spurious and for the Kingdom this is more true than any other. Remember that twice in the last five years they have ‘helped’ the market out by producing flat out at $125 oil, first during the Libyan civil war and then when sanctions against Iran came in. Bumper profits at that time, plus huge reserves and no debt, mean that the KSA can and will endure lower prices for a very long time, there is no staring out Ali-al-Naimi. Also, by taking the opportunity to see prices down here for a little while, invaluable information about oil price sensitivity will be garnered and used to determine at what level the floor might be. This last point also reflects my own view about the cyclical nature of the oil price, like most commodities the current low price will strangle investment and ensure that in time shortages will happen and the price will rise.

On Wednesday Naimi said that the oil market would ‘stabilise itself eventually’ and this is probably the closest to the backdrop that his delegation believed yesterday, taking some modest short term pain might mean that further out things will get better. Indeed I have a feeling that while it is appropriate for markets to react in a negative fashion and mark prices down at the moment, the ability to weather this storm may prove advantageous in the longer term. I say this because the supply and demand numbers are not that much out of kilter as some people might think and this may be why no interim Opec meeting has been slated. During the last few months Opec has gone over its 30m b/d ‘quota’ and with the call for crude at, say 29.5m, created an oversupply in the market which has along with higher US production brought the price down. If you look at current Opec numbers I tend to think that with Libya falling dramatically, possibly by as much as 400-500/- b/d the number could already be back close to the magical 30m b/d.

So,overall I believe that whilst short term pain will have to be endured by the producers and participating companies, those who are able to take a longer term view will find that a combination of some loss of unprofitable production(maybe 1/2m b/d) and a pick up in demand will validate the Saudi view that the market will stabilise. I can see through this combination that by the second half of 2015 a million b/d or more may have swung around and that doesn’t yet include the benefits of much cheaper oil on world GDP growth. If you can keep your head when when all about you are losing theirs you may just find that next year may be one of two halves and that after a bad first quarter the oil price will start to return to higher levels after all. Having tried to put as many clichés in as possible I will add just one more and that is to be careful of what you wish for, the cycle will mean that, in the absence of fundamental change the boot will return to the other foot one way or another.