Baku, Azerbaijan, Nov.7
UK's first radio station dedicated to providing information on handling money and investments - Share Radio - has touched upon a very trending topic, which is the fall of the oil price on the world market. As part of the Morning Money program, Trend Agency's Deputy Director General Vagif Sharifov spoke on the issue.
Mr. Sharifov, you follow the oil market on a daily basis - how are oil prices looking this morning on the back of OPEC's announcement yesterday?
For the first time in three years, the crude oil barrel price fell to its lowest this week. Saudi Arabia was the country leading an international standoff of who will act first by cutting the oil production. There already are differences among OPEC members on the ideal price. That is exemplified in the competition between Iran, which relies on a stronger market to remain profitable, and Saudi Arabia, which can withstand lower prices. So this morning the price of Brent for December delivery settled down at $82-83 dollars per barrel after touching its lowest point since October 2010.
What were the key points in OPECs oil market outlook?
OPEC's outlook says it is fossil fuels that will continue to play the leading role in satisfying world energy needs in the future. They predict the Global oil demand will increase by an average of 1 million barrels per day annually, reaching 96 million barrels per day by 2019. The key to demand increases is clearly developing countries. And for the next year OPEC predicts world oil demand at 92 million barrels per day. But in terms of the global energy mix, renewables I mean hydropower, wind and solar - are expected to continue to grow at a fast pace as a result of government support. But given their low initial base, their share of the global energy mix is expected to remain modest by 2040.
Earlier this week Saudi Arabia, which is part of OPEC, cut its selling price of oil to the US drastically. What was the background for this?
The price now wants to show us that the world produces too much oil. OPEC members are producing too much crude to meet falling demand for the current market driving down prices further. In addition the US exported more than 400,000 barrels per day of crude oil - yes - in July, but that was the highest level of exports in 57 years. The decline in developed market demand, especially in the Atlantic Basin during Q2 dragged refinery margins lower and likely initiated the weakness in prices that developed during Q3. 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 happen over the course of current Q.
What does this mean for other oil producing nations like the US and Russia?
Descending tendency in oil prices has already caused concerns among OPEC member states and the countries that are highly dependent on oil export and import, which have to find the way how to deal with this situation and to avoid the negative effects on their economy. For nearly three years since Brent price has exceeded $100, economies of Russia and the United States for example adapted to such a high price and its impact on macro-economic stats.
State and public revenues have increased, as did the level of the balanced budget. Both state and public expenses have increased as well, and it would be extremely painful to cut them down now. Turning back to Russia Deutsche Bank for instance now expects Russia's economy to contract by 0.2 percent next year, recovering slightly in 2016 to a moderate growth rate of 0.8 percent.
This price cut as well as OPEC's announcement came as a shock to the market - can we expect prices to go even lower?
No we shouldn't expect that. Brent could trade in the $90-$95 per barrel range if demand pick up noticeably during the winter months. JP Morgan for instance expects global oil prices will recover in the next year with Brent to average $115 per barrel. Definitely everything depends on OPEC's meeting in November but it is obvious at 70 per barrel, there will be panic in OPEC. If oil prices were to fall to $70 it would put pressure on the budgets of some OPEC member countries. The future developments of the oil price will largely depend on how OPEC decides to manage the supplies, facing the strong growth of non-OPEC oil sources.
What can we expect from the oil market in the coming months?
First of all, the market will endeavor to balance itself as usual. But the issue of whether to keep or cut OPEC's oil production quotas in order to stabilize oil prices will be discussed on November 27. Many experts believe that in the coming months the oil prices will be $93-$99 for barrel because of winter at least. So, all things being equal - the active oil production in the Middle East and the logical depletion of oil fields because of lack of new oil investments due to high risk because of instability in some countries of that region will lead into limited oil supply on global market in 5-10 years, which can lead to a price of even $150 per barrel.
Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter:@VagifSharifov