RIYADH: A market slump is in the making.

With oil trading at almost three month low, bearish oil traders are beginning to predict another nosedive in the oil market price to $35 a barrel or even lower.

Supplies continue to inundate. The Energy Information Administration is now reporting a rise in US oil reserves for the eighth consecutive week.

In the meantime, a surge in production has led to a global stockpile of three billion barrels of crude, roughly the equivalent of a month of world oil production. The global market has never been this saturated since 2009 when demand for fuel plummeted.

Meanwhile, physical oil cargoes are trading at large discounts as oil has started to strain ports and storage with vessels in queue to unload at some major hubs.

The glut has already seen Iraqi crude grades selling as low as $30 a barrel while official selling prices from Nigeria too have fallen to their lowest in more than a decade.

Crude futures are down around 60 per cent since mid-2014 as supply has exceeded demand by 0.7 million to 2.5m barrels per day, creating a glut that many are now saying could last well into 2016.

Elevated output, a slowdown in demand growth in China and the expectation that the Iran nuclear deal will introduce large quantities of oil to an already brimming global stockpile, are making the markets weary.

Concerns over demand are also under the scanner. The Inter­na­tional Energy Agency is now suggesting that world demand growth for oil would slow next year to 1.2m barrels a day after reaching a five-year high of 1.8m barrels a day in 2015.

With Japan once again in recession and European economy in doldrums, concerns about the state of global economy are dampening the demand outlook.

Traders are thus cautious, beginning to speculate what additional effect a mild winter caused by the El Nino weather phenomenon would have on prices? That could significantly lessen demand for heating and therefore oil, Reuters reported.

All this brings to fore the issue of investments which in new exploration are already down about 20pc this year, and more cuts are expected in 2016.

As per Wood Mackenzie, about $200bn in new oil and gas projects have been delayed or cancelled in 2015.

And with markets now anchoring solidly into a below $50 era, African oil boom is fading too. Exploration drilling in Nigeria is now close to the lowest in more than a decade because of shelved investment plans. Tullow Oil Plc, responsible for some of the biggest discoveries on the continent, is concentrating on safer projects in Ghana and Kenya after trimming its annual exploration budget to about $200m from $1bn.

African production, already 19pc below its 2008 peak of 10.2m barrels a day, is set to drop for a third year.

The absence of legislative and regulatory certainty has reportedly halted investment of as much as $5bn by explorers including Shell in South Africa. In the current scenario, only a third of $270bn of potential investment projects in Africa make economic sense, Obo Idornigie, of Wood Mackenzie, was quoted by Paul Burkhardt as saying. All this needs to be read in the back drop of the reality that, six of the 10 biggest global oil discoveries in 2013 were made in Africa.

It was in this perspective that the Saudi oil minister Ali Al-Naimi called for more investments. Oil production capacity across the world would drop by about 4m bpd each year, Naimi underlined. With demand growing steadily, the world needed new oil output every year of 5m bpd.

Already the spare capacity is low and this could impact the markets any time.

Any major geopolitical upheaval could impact the markets adversely, pushing markets to spike.

Oil world is not in the best of the shapes. And it’s not just the current market woes. The future of the industry is now at stake too. And the world is seemingly not prepared — to say the least.

Published in Dawn, November 22nd, 2015

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