Why are oil price rising again?

Oil&Gas Materials 7 February 2015 13:47 (UTC +04:00)

By Dalga Khatinoglu

The oil price in international markets has increased since Jan. 25 by 18 percent, but at a slow rate.

Brent crude for delivery on March 15 is being sold at $58.21 on Feb. 6, indicating a 2.9 percent increase day-to-day, while the figure was fluctuating below $49 in the week to Jan. 25.

The Brent price was about $112 in June 2014, while OPEC basket price was around $108/barrel.

OPEC's crude basket price increased from $42.9 on Jan.26 to $52.22 on Feb.4, but a day after that fell back to $50.81/barrel.

The co-director of the Institute for the Analysis of Global Security (IAGS) Anne Korin told Trend Feb. 6 that "there have already been investment stoppages and the market is starting to understand that the supply-demand relationship will tighten resulting in higher prices".

Total investment in oil projects may fall by $100 billion, or 15 percent, this year, IEA Chief Economist Fatih Birol said at the World Economic Forum in Davos Jan. 21.

On the other hand, Abdalla Salem el-Badri, secretary general of the Organization of Petroleum Exporting Countries (Opec) warned on Jan.26 that oil is in danger of rebounding to levels of $200 per barrel unless billions of dollars are invested into developing new fields despite the pressure on oil companies to make deep cutbacks in response to falling prices.

Korin who is an adviser to the United States Energy Security Council believes that the commentary from OPEC's Secretary General regarding $200 oil prospects if investment is too low also affected the mood.

Shale oil vulnerability

Fereydoun Barkeshli, the former general manager of National Iranian Oil Company (NIOC) in OPEC and International Affairs told Trend Feb.6 that decline in shale oil operating rigs are now confirmed to be more than reported in late December.

"It is estimated that that some 25 percent of operating rigs in Dakota and other places have run into trouble. The market has shown powerful signals that crude prices could remain low for a considerable period of time. In fact, negative impact of $40-50 per barrel is also serious for conventional crude oil production," Barkeshli said.

Barkeshli, who is currently a private energy consultant and president of Vienna Energy Research Group, added that some powerful remarks by OPEC and Al-Badri indicating that crude prices could jump back much above $100 per barrel was important too.

"In fact the current price rise that you referred to is after powerful signals from OPEC. The passing away of King Abdullah and coming to power of a relatively moderate King with indicated interest in better relationships with Iran and wanting to depoliticized oil has been positive factor too," he added.

Saudi Arabia has the heaviest weight among other 11 members of OPEC, sharing a third of Cartel's total production, but strongly against cutting oil production level, arguing that OPEC should fight to keep its place in the global markets.

The role of speculators

However, Sam Barden the director of SBI Markets, an international commodity trading and advisory company which advises governments and private firms on deal financing and facilitation told Trend Feb.6 that as the oil price moved down through $50 we have seen financial speculators move back into the market.

"These speculators do not represent actual demand for oil, they are merely seeking to make transactional profits on futures contracts because they believe that the oil price will rise. There has also been an element of short covering, again by finical speculators, as oil has moved below 50 USD," Barden said.

Bloomberg reported Jan.23 that In June 2014, when prices were above $100 a barrel, speculators had accumulated a record long position in oil futures. As oil tumbled, money managers sold out of their positions, adding momentum to the decline, but now, speculators are again wagering that prices will climb.

According to the report, during the week ending Jan. 13, hedge funds and other big money managers bought the equivalent of 24.6 million barrels on the Nymex, accumulating their biggest bullish position since August.

Barden says that "the reality is that the physical oil market remains over supplied, and this is largely due to the unwinding of carry trades between banks and oil producers, where banks swapped USD for oil (forward) as a hedge against inflation, and oil producers swapped oil for interest free loans".

He underlined that when the USA put an end the QE program (quantitative easing) these carry trades could not be rolled over, so the oil producers delivered the oil into the market. "This is where the oversupply has come from, because the demand up until then was financial, not actual demand. As a result, above ground storage, strategic reserves around the world are overflowing. We are even seeing tankers being chartered and used simply for storage".

Barden says that the result in his view is that there is still downward pressure on the oil price.

"I believe that we will see the oil price settle somewhere in the USD 40 to 45 range, however with the speculators still in the market, those who are taking long positions now might get badly burned, and capitulate (all become sellers together) and the oil market could spike to the downside, going as low as USD 25 before moving to the $40 to $45 range where it will settle."

Edited by CN

Dalga Khatinoglu, head of Trend Agency's Iran news service.

Follow him on @dalgakhatinoglu