Baku, Azerbaijan, May 13
By Elena Kosolapova - Trend:
Oil prices on the world market are likely to continue fluctuating, well-known US geological consultant Arthur Berman believes.
"I see an equal probability that oil prices could rise or fall by $10-20 or continue moving sideways," Berman told Trend. "I believe they will move sideways until something hard happens."
Such a hard factor could be cutting or not cutting of production quotas by OPEC, clear production decline, clear demand increase, a geopolitical crisis or combinations of those factors, according to the expert.
Berman said that the reasons for the current oil-price collapse are complex.
"The obvious cause is a production surplus principally from expensive, tight oil from North America," he said. "A secondary cause is demand destruction after the longest period of oil prices more than $90 in history. The larger and more systemic problem is that overall demand for all things has never recovered after the Financial Collapse of 2008."
Berman believes that current moderate increase in oil prices is based on pure sentiment. Some of this sentiment is founded on things like rig count that should result in reduced production in the United States.
However the correlation between rig count and oil price since January 1, 2015 is 38 percent meaning close to no correlation, he said.
"Oil price rose in February, fell in March and has been rising again in April and so far in May-all the while rig count has been falling. Rig count is a "soft" factor," he said.
What will be a hard factor for oil prices is some decision on production quotas by OPEC, according to Berman.
"If OPEC doesn't cut production next month, prices could easily drop to $50 or lower. If OPEC cuts production, prices could rise to $70," he said.
Moreover, Berman believes there are indications of increased demand, and that could become hard factor.
"But it is mostly U.S. and, to a lesser extent, OECD (Organisation for Economic Co-operation and Development) where we have data on inventories. It is hopeful but still somewhat soft," he added.
Berman noted that there is presumption is that the price collapse is a simple matter of a current production surplus of 1-2 mmbpd. However a surplus was greater in 2004 (almost 2 mmbopd) and 2005 (over 3 mmbopd) without any price decrease, he said.
In the first half of 2012, a surplus exceeded 2 mmbopd and the prices for Brent oil decreased from $126 to $91 per barrel. But within 2 months, prices were back to $116.
Something different is happening now, Berman said.
"Production surplus is a big factor but 33 months of oil prices above $90 per barrel is an extraordinary factor and the state of the world economy and world demand are other factors that we must somehow consider," he said.
The expert noted that U.S. production may have been the trigger for the over-supply, but it is not the entire story. Besides, Libyan production bounces up and down several hundred thousand barrels each month as the civil war interrupts supply.
"That's almost as much as the total U.S. decline that I model out into late 2015," he said.
Moreover there is Iran which can change the situation in the energy market. According to Berman, if sanctions come off, there could be another 2 mmbopd there. Meanwhile the expert does not think it will be that extreme and, in any case, will not happen all at once. Iraq is another wild card in the oil market, he noted.
Berman believes that resolution of the problem with low oil prices may be as simple as a fall in U.S. tight oil production that will balance the market and cause higher oil prices.
"But higher prices will bring back the same old problem of over-production," he said.
Edited by S.I.
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