RIYADH: A new demand and supply equilibrium seems round the corner.

“The markets are calm…Demand is growing,” insisted the Saudi oil minister Ali Al-Naimi last Wednesday in his ‘first public comments’ since December.

Many took this as a cue that Riyadh was satisfied with the current state and that Saudi Arabia has won the first round of the ongoing battle for market share.

A day earlier, a senior Gulf Opec delegate too had conceded that oil prices had started to stabilise around current levels – effectively dropping a price anchor at $60 a barrel.

The comments came as Brent continued to hover at around $60 a barrel as demand appeared healthy. Energy Aspects, a research consultancy, estimated that global demand for crude reached a record high of 94 million barrels a day in December. This was growth at its quickest pace in 18 months.

Gasoline demand in the US alone grew by almost 500,000 barrels a day in January, a JBC Energy report said. While this is likely due to drivers reaping the rewards of cheaper pump prices, JBC said, the current pricing environment is also beginning to shape longer-term driving habits.

According to Autodata, sales of light trucks and SUVs grew by 19.3 per cent over the year in January, representing 54pc of the sales mix, while passenger cars grew at a more modest 7.7pc.

With US drillers idling rigs at a record pace, gutting investment plans and laying off thousands of workers, the rebound seems vindicating the Saudi insistence on Organisation of the Petroleum Exporting Countries (Opec) not to cut output at its November 27 Vienna outing, many are now asserting.

“Opec giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp in New York told Bloomberg.

“The Saudis are saying — look, everything is happening the way it needs to happen. Others are cutting capex, production growth is slowing and low prices are stimulating demand,” Yasser Elguindi from Medley Global Advisers told Reuters.

The US Energy Information Administration reduced its 2015 US crude production forecast to 9.3 million barrels a day in February from 9.42m in November. The EIA projects output will fall in the third quarter – for the first time in four years.

Olivier Jakob from Petromatrix consultancy hinted at another big unknown, the ongoing nuclear talks between the West and Iran, which could lead to a softening of sanctions against Tehran and a potential release of as much as 1m barrels per day of additional oil to the market.

Shale oil producers are feeling threatened. They are throttling back so quickly on drilling that US crude output could fall sooner than expected.

“The thing that has surprised me ... is that companies large and small, financially strong, financially weak have really cut capital spending much quicker than I have seen before,” Bruce Vincent, the former CEO of Swift Energy Co told press.

In the past, if a producer had a rig contract, they would continue drilling. Now, producers are paying fees to break those contracts, a fact that has hastened the steep drop in the rig count, said Vincent. Magnum Hunter Resources Corp has halted all drilling and told services firms it will not resume work unless its costs fall 40pc, the company’s Chief Executive Gary Evans told a conference in Houston.

Such pullback, combined with shale well decline rates of some 60pc or more a year, has Evans predicting US production will begin falling “in the next two months.”

On its fourth-quarter earnings call, Devon Energy Corp. said it had cut its completion crews working in the Eagle Ford oil basin to four from nine, while Anadarko Petroleum said it reduced its completion crews by a third. After years of breakneck growth, top shale companies Apache Corp and EOG Resources have said their oil and gas output this year will be flat.

New discoveries too are down. According to IHS, new finds of oil and gas were the equivalent of 16 billion barrels last year, the lowest for 60 years.

Although professionally hazardous, yet one could now say with some conviction that prices could stabilise somewhere around the current level.

Published in Dawn March 1st , 2015

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