WHILE there is a buzz all around, and even the Prime Minister Imran Khan is giving a fillip to it saying Pakistan is about to hit ‘crude’ jackpot, serious professionals strongly feel this is fairly early to say anything and come to any conclusions — especially about the size and quality of the find — if at all.
Indeed, there are definite prospects, yet no one could be certain at this moment. And one needs to bear in mind, even if there is a substantial find, it will take several years to bring it online.
And while the Pakistani chatterboxes continue to discuss the ‘find’, non-fundamentals are controlling the crude markets. Output cuts by the Organisation of the Petroleum Exporting Countries (Opec) including Russia and the US sanctions against Iranian and now Venezuelan oil exports are providing support to oil prices, resulting in 32 per cent spike in oil prices — over the last few months.
But in the longer run, signs are not good. Fundamentals are weak. The global economy is not in the best of the shapes. Most hence agree, markets may not stay bullish for long.
The current bullish run is being driven by the Opec and its allies. Opec kingpin, Riyadh is determined to do whatever it takes to rebalance the oil markets. It is already pumping well below its quota under the Opec+ deal and is vowing to go even lower. In the process, it is sacrificing market share, at a point in time when the US is emerging as a major exporter and is actively looking for overseas buyers for its shale oil and products.
As per a Reuters report, Riyadh is targeting a market price of at least $70 a barrel for Brent crude. The Saudis need an even higher oil price for a budget breakeven in 2019 — somewhere around $80-85 a barrel, Jihad Azour of the IMF told Reuters last month.
For a number of reasons, the target may not be achievable.
US crude output continues to grow. This is a spanner in the Saudi moves to handle the glut. “This is the new American energy era,” US Energy Secretary Rick Perry told an industry conference in Houston earlier this month. Over the past four weeks, US oil exports have averaged more than 3 million bpd. This is more than what Kuwait sells. Oil traders and shale executives now believe the US crude exports are set to reach 5 million barrels per day by late 2020.
The IEA now says US petroleum exports will reach roughly 9m bpd within five years, up from just 1m bpd in 2012.
This is incredible. And this means, even if Saudis somehow succeed in managing and influencing the crude markets at this point in time, this would not be tenable in the longer run.
And in the meantime, the global economy continues to emit mixed signals. A recession seems to lurk around. Concerns about a potential US recession re-emerged after cautious remarks by the US Federal Reserve, earlier the month. This caused 10-year treasury yields to slip below the three-month rate for the first time since 2007.
Global growth concerns intensified mid-March as eurozone manufacturing activity fell to a five-year low, while, manufacturing output data from Germany, Europe’s biggest economy, shrank for the third straight month. Already Chinese economic growth, standing at 6.6pc in 2018, was its lowest since 1990. Markets are nervous. Fears of a deepening, global, economic slowdown are rattling the financial markets. If the global economy slows down, we are in for a crude demand crash too.
And thus despite the spike here and there, pundits are concerned. As per a ‘Financial Times’ report, some of the biggest physical traders in the industry — from Royal Dutch Shell to Glencore — are cautious.
Glencore’s Alex Beard, heading the mining and trading group’s oil operations told FT that a run at last year’s peak of $86 a barrel was unlikely. “I think the market is going to struggle to get back to those levels.” Mark Quartermain, Shell’s crude oil trading head, told the FT the market was stuck in a $60-$75 a barrel range, while Trafigura’s co-head of oil, Ben Luckock, said he was at best “gently bullish” but did not see prices going much above $70.
Markets are also concerned about the impact of electric vehicles on crude dynamics.
Trafigura expects global oil demand to peak by 2030, while Shell thinks, it is even closer.
Long term crude horizon is definitely not rosy, one could now underline with some certainty. Consequently, crude geopolitics is also passing through a major transformation.
Published in Dawn, March 31st, 2019