Oil prices: current assessments and future expectations

Oil prices: current assessments and future expectations

Baku, Azerbaijan, Nov. 4

By Aygun Badalova - Trend:

Oil prices continue to swiftly fall on the world markets. During Monday's electronic trading on the New York Mercantile Exchange the West Texas Intermediate (WTI) for December delivery dropped by $1.76 to $78.78 a barrel. This is the lowest level for this brand's price since June 2012.

December Brent, which is the benchmark price for products in Europe and Asia, downed by $0.27 to $85.59 a barrel on the London-based ICE Futures Europe exchange.

Reasons for oil prices drop

The drop of WTI price below $80 per barrel is explained by the decision of the State oil firm Saudi Aramco to cut the price of flagship Arab light crude in December for the US buyers.

The fall in the Brent price is cause by the news on slowdown in China's manufacturing. China's Purchasing Managers' Index was at 50.8 for October, government data showed on November 1, trailing the median estimate of 51.2 in a Bloomberg News survey and below September's reading of 51.1.

China is the world's second-largest oil consumer and is expected by the International Energy Agency to account for about 11 percent of global oil consumption this year.

Analysts' assessments

The assessment of the analysts from the U.S. bank JP Morgan for Chinese oil demand signals average demand growth around 160,000 in the year through August 2014, a substantial downgrade from the 430,000 they expected last December.

"This sub par growth rate has partially been offset by better than expected growth from other Asian countries," the analysts said in a report obtained by Trend.

Analysts' assessment of Chinese oil demand is based on refinery runs, product trade and reported stock changes.

The analysts said that the decline in developed market demand, especially in the Atlantic Basin during 2Q2014 dragged refinery margins lower and likely initiated the weakness in prices that developed during 3Q2014.

Oil product demand in 4Q2014 should nevertheless increase on a qoq (Quarter On Quarter) basis by 0.6 million barrels per day, comparable to 4Q2013, but ahead of the five-year average qoq change of 0.3 million barrels per day, the analysts said.

Effects on oil producing countries

Descending tendency in oil prices has already caused concerns among OPEC member states and the countries that are highly dependent on oil exports, which have to find the way how to deal with this situation and to avoid the negative effects on their economy.

Azerbaijan as an oil producing country sees no problems in the volatility of world oil prices, as the scenario of lower prices is also taken into account when forecasting the volume of revenues, according to the President of The State Oil Company of Azerbaijan (SOCAR) Rovnag Abdullayev.

He said the expenditures and investment program of SOCAR are adjusted depending on the oil prices. Azerbaijan's state budget for 2014 was formed based on the oil price of $100 per barrel.

SOCAR's total revenues stood at 38.43 billion AZN as of 2013, compared to 17.14 billion AZN in 2012. SOCAR received 8.95 billion AZN of its total volume of revenues from the sale of petroleum products, while 1.85 billion AZN fell to the revenues from the sale of petrochemical products.

Future expectations

JP Morgan's analysts believe that current price dynamics indicate the need for OPEC members to adjust output lower.

Failure to do so would undermine their confidence in rebound in prices they currently expect to occur over the course of 4Q2014.

"Short-term tactical moves are required to retain market share in the face of increased competition from African exports, hence the need to adjust OSPs (official selling price). However, with forward refining margins offering little incentive for refineries to increase runs aggressively at this point, how much production is required to help balance supply with refineries' demand for crude is a strategic decision for OPEC members to take," analysts said.

Overall JP Morgan expects global oil prices will recover in 2015 with Brent to average $115 per barrel and WTI - $108 per barrel.

The next OPEC meeting is scheduled for November 27.

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