Syed Rashid Husain The changing global crude outlook is manifesting itself in more than one way. Possibility of glut has spurred a number of analysts to project a price crash – in not too distant a future. Indeed there are ifs and buts to it – but most are of the view that the world is heading toward a glut-like scenario. Downward price trajectory is imminent and a buyers' market could be just round the corner, some are now insisting. Fadel Gheit, the Cairo born analyst working for Oppenheimer, now believes oil prices are in a bubble. 20-30 percent of the current oil price reflects a "supply risk premium" that will disappear when Iran's nuclear issue is finally resolved, he is underlining. In a rather authoritative note to clients, Oppenheimer last week underlined: "We believe the current oil price bubble will burst eventually and the question is not if, but when and to what level." And then goes on to say: "Oil prices in the $75-$85 range would help spur global economic growth, keep inflation low, boost consumer confidence, and still fund many new oil projects. An ultimate deal between Iran and Western powers could open Iran's vast oil and gas resources to western oil companies, increase supplies, lower oil prices and squeeze speculation out of the picture, Gheit strongly argued in this note. Laying out his argument, Gheit also underlines that the recent surge in Brent market prices was mainly driven by speculation – and not – fundamentals. And has a reason behind to support the argument. He argues that though output from Libya and Nigeria were reduced and the overall exports from these two countries went down by almost 1 million barrels per day (bpd), yet these were largely offset by output increase from other OPEC members. In the overall mathematics, there was not much dip in OPEC output. Markets were not tight. Hence fundamentals were not in the driver's seat. And now with increment in Iranian output appearing a possibility, if and when (and this remains a big if, one needs to underline), the prospect of a price crash cannot be ruled out, Gheit hence argues. After all Iran produced 6.1 million bpd of crude and exported 5.5 million bpd, way back in 1974, he said – apparently attempting to drive the point that Tehran has the potential to up its output considerably. And then he also reiterates that the production growth outlook for US shale oil and Canadian oil sands is technology driven. This would help improve efficiency, reduce cost, increase recovery rates and enhance economic returns even at much lower oil prices. This would indeed take care of the ‘fear' within the North American energy fraternity that a compromised oil market could apply brakes to the development of non-conventional energy resources. However, Ghait is clear. This would not mean the end of OPEC. It is there to stay, he underlines. ‘It has survived low oil prices, economic downturns, regime changes, Western invasions and regional wars,'” he argues. However, he was quick to warn that population explosion, high youth unemployment, and inequitable distribution of wealth in the oil-producing region could hasten OPEC reaching irrelevancy sooner than expected. Complementing the above arguments, a recent Reuters poll of analysts too forecasted that ample supplies boosted by the US shale oil revolution and anemic demand growth were expected to pressure crude oil prices in 2014. The monthly survey of 27 analysts projected Brent crude oil would average $104.10 a barrel in 2014, down from this year's average price of $108.50. Last month's poll saw Brent averaging $105.40 in 2014. The poll expects Brent to average even further low in 2015- $102.60 a barrel. “Increases in production from both the United States and Iraq will lead to excess supply in the market amid subdued demand growth,” said Rahul Prithiani, director at CRISIL Research. And while most analysts are speaking of a changing crude dynamics due to growing output, Goldman Sachs is pointing to the emerging new “world order.” For the first time in decades, Goldman points out that demand in the United States is outpacing demand growth in the emerging economies – such as China and India. A trend reversal is very much apparent; the Goldman note to clients underlined last week, emphasizing the world was in the ‘cusp of a new cycle.' Now reasons for this reversal are pretty evident to Currie, the Goldman analyst writing the note. “US demand has been boosted in part by the fact that gasoline prices are 15 percent lower in Chicago than in Singapore.” And the EIA too says that retail prices in the United States were at the lowest level in three years – at the end of November. Low crude prices definitely spur consumption. Who could bear witness to it more than one, who has been living in this energy rich region for more than two decades now? And the growing consumption in the US is likely to have profound implications on how oil markets operate. As US shale production drives down prices for American consumers, the market may shift, Currie says in his note. “As oil demand leadership transitions to developed markets from emerging markets, this not only represents a significant fundamental shift, but combined with significant developed market-led production, this turns the previous commodity cycle upside down.” Although the immediate impact of this new cycle could be subtle, yet in the longer run, three inter-related developments to flip the market on its head. First, he writes, the boom in US shale oil output should keep oil prices in the United States low and lead to a “substantial acceleration” in its economic activity. Second, stronger US growth will lead the Federal Reserve to scale back its monetary support, which is likely to strengthen the dollar. That should put pressure on emerging market demand by making oil and other commodities priced in the greenback more expensive for users of other currencies. Third, weaker oil demand growth in countries including China and India should help keep markets well supplied, limiting inflation in developed countries. And ultimately, Currie underlines, this reversed trend will lead emerging market economies to “shift from being consumers to producers,” forcing countries such as China to follow the US path in tapping unconventional resources. Global energy dynamics of tomorrow is to be significantly different from today – one could now say with some degree of confidence.
