What’s next for oil prices?

Baku, Azerbaijan, Aug. 19

By Aygun Badalova - Trend:

Since early August, the average price of t Brent Dated spot has been $48.21 per barrel, or $3 more than the minimal price recorded in mid-January this year. From August 14, the Brent price fell below $48 per barrel.

The question now is whether the prices have reached the bottom or we should expect a further drop, and what will be the main factors affecting the price.

"Whether we have found the bottom of this oil price cycle will depend on future events," Geoffrey Styles, managing director of GSW Strategy Group, LLC, an energy strategy consultancy based in Virginia (USA), told Trend.

"For example, the latest weakening followed China's unexpected decision to allow its currency to fall vs. the US dollar, which many interpreted as a sign of lower growth ahead in China, which has been a key contributor to oil-demand growth," he said.

Responding to an 8.3 percent drop in exports for the month of July, China unexpectedly devalued its currency last week, which has made the yuan about 3 percent weaker against the dollar.

Analysts of the US JP Morgan bank see little in China's move to act as a catalyst for a further fall in oil prices with limited impact on Chinese oil demand.

Another factor that could potentially affect the future oil prices dynamic is an expected Iranian export boost following the lifting of the sanctions.

Iran earlier stated that if the sanctions imposed on the country are lifted, it would be able to increase oil production in three months and bounce back to the pre-sanction level of export. In particular, the country plans to bring its export volume to 2.5 million barrels per day.

Geoffrey Styles believes that the country may have more difficulty than it expects in placing expanded exports when sanctions are lifted.

"Other producers took advantage of its reduced exports under sanctions to grow their share of key markets for oil of this type and may not cede these gains easily. To the extent the market expects the nuclear deal to be signed, resulting in an extra 600,000 to 1 million barrels per day of supply from Iran within a year or so, this is likely already factored into today's price. So, I do not expect prices to be cut in half again from their current level," Styles said.

He also noted that even today's prices are below the long-run costs of some producers and many new oil projects.

"While US shale has proven surprisingly flexible in adapting to lower prices, the market requires much more supply than the total of US and OPEC output," Styles said.

"Yet while other producers could choose to do what OPEC has elected not to, by cutting their own output, this is not an easy decision for any individual producer in an over-supplied market. They would see their revenue fall even further, with no guarantee of a corresponding price rise on their remaining sales," he added.

He said OPEC itself demonstrates how hard that is to agree on, even where such behavior is not strictly prohibited by law, as it is in the US and EU.

"And as OPEC's own history shows, it is easier for countries to agree to coordinate cuts than to live up to them," Styles said.

Currently, OPEC's quota for oil production is 30 million barrels per day. However, the member states do not comply with this quota. OPEC crude production fell in July by 15,000 barrels a day to 31.79 million barrels a day, according to International Energy Agency. Nevertheless, its production held steady near a three-year high.

Edited by CN

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