Expect the unexpected: $150 per oil barrel

Expect the unexpected: $150 per oil barrel

Baku, Azerbaijan, Oct. 15


The oversupply of oil to the world market due to partially-restored oil production in unstable Middle East countries and a decrease in oil imports by the US - all this leaves very little hope for high prices in the short term. In the long term however, it can all turn into an Economic miracle.

The current decrease in prices is easily explained - there's a lot more oil than the consumers need, and for obvious reasons in autumn. On the other hand, not all the big importers recovered from the economic crisis, or their economies are in stagnation. This, in turn, cause a decline in demand for raw materials.

During the last 30 years, the lowest spot price for Brent oil price, on FOB basis, was fixed at $9.1 per barrel in Dec. 1998. Ten years later the price reached its historic maximum level (which stands up to this day) - $143.95 per barrel in July of 2008.

From there on, the prices behaved totally different. The last time Brent oil barrel exceeded $100 was in Feb. 2011, and it didn't decrease until the end of summer 2014.

Since the beginning of 2014 and until the end of August 2014, Brent price has never dropped below $101 per barrel, while the maximum price reached $115 per barrel in 2014.

The first signs of decline started to show up on August 18, as Brent price dropped to $99,37, and remained at that level for two days. Then, the price dropped to $99.51 per barrel on September 5, and continues to fall until this day.

For nearly three years since Brent price has irrevocably exceeded $100, economies of many countries adapted to such a high price and its impact on macro-economic indices.

State and public revenues have increased, as did the level of the balanced budget. Naturally, both state and public expenses have increased as well, and it would be extremely painful to cut them down now.

Despite that experts of some big world banks, interviewed by Bloomberg in October 2014, believe that in Q4 of 2014 the oil prices will be $93-$99 for barrel, while forecast for Q4 2015 is $70-$80 per barrel.

Various western and middle east experts give various opinions of what is happening, the situation is of concern to countries, including the OPEC members, the state budgets of which largely depend on raw materials and its prices.

The data from the government of Libya, Angola's Finance Ministry, IMF, Deutsche Bank, Reuters, The Economist and The Wall Street Journal show that Qatar will have a deficit-free budget for 2014 if the oil prices are equal to $58-$65 per barrel, Kuwait - $59-$75, UAE - $70-$90, Libya - $90-$111, Saudi Arabia - $92-$93, Angola - $94-$98, Iraq - $106-$116, Venezuela - $117-$121, Algeria - $119-$121, Ecuador - $117-$122, Nigeria - $119-$124 and Iran - $136-$140 (the highest price).

On Oct. 14, the International Energy Agency (IEA) decreased the forecasts for the world demand for oil in 2014 by 0.2 million barrels per day and kept it at 92.4 million.

This is while the US Energy Information Administration (EIA) prepared a rather interesting plan for long-term development of the oil prices. The EIA experts presented three traditional cases on the prices for the Brent oil:

Reference case (Year - US dollars per barrel):

2020 - 97;
2025 - 109;
2030 - 119;
2035 - 130;
2040 - 141.

Low oil price case (Year - US dollars per barrel):

2020 - 69;
2025 - 70;
2030 - 72;
2035 - 73;
2040 - 75.

High oil price case (Year - US dollars per barrel):

2020 - 150;
2025 - 159;
2030 - 174;
2035 - 188;
2040 - 204

Naturally, the long range of the forecasts lowers their accuracy.

By concentrating on the period from 2020 to 2025, we can say that the oil prices do not increase by more than 12.5 percent in any of the above mentioned forecasts.

By comparison, during the period from 2009 to 2014, the prices for oil have increased by 1.7 times from the average price of $61.73 per barrel in 2009 to $106.26 in 2014.

The reality is that countries can cooperate in the economic sphere only with the prices indicated in the reference case and low price cases.

No one has ever experienced the high price case, although the EIA believes that under such developments the daily oil consumption in 2020 will be 94.8 million barrels, and will rise to 122.1 million barrels per day in 2040.

It is rather interesting that in 2020, under the EIA high price case, the global demand will raise by only 2.5 percent of the daily oil consumption level in 2014 predicted by another organization - the IEA. The latter said the oil price in 2020 will be as much as $150 per barrel.

Thus, considering the adjustments to the growth of world economy and population, it is projected that after six years we will be consuming nearly as much oil as we do now, but for the price of $150 per barrel.

The probability of such hard outcome cannot be ruled out, especially because the current insufficient investments made in geological exploration and additional development, and the discovery of new fields in the Middle East, can cause a shortage of oil supplies to the world market in 2020.

In fact, the current active oil production in the Middle East, the logical development of fields, lack of new oil investments, and the instability in some countries of this region will develop into limited oil supply on global market in 5-10 years, which can lead to a price of $150 per barrel.

This is backed up by the EIA forecasts (under the high price case) that the liquid hydrocarbons production in the Middle East will fall to 22.6 million barrels per day in 2020, compared to 25.9 million barrels per day in 2011.

And here it is worth noting that in 2011 the average Brent oil price per barrel was $111, the minimum price being $93.52, and the maximum - $126.64 per barrel.

Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter:@VagifSharifov

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