Friday 19 January 2018

Dan White: Oil prices are finally set to tumble this year

Supply is set to rise from Iran, Libya and the US, while demand is tapering off as China faces into a recession

WITH Iranian oil set to return to the market by mid-year, the fracking revolution rapidly making the United States self-sufficient in energy and the major developing economies sputtering, 2014 is set to be the year that oil and gas prices finally tumble.

More than six years after most developed countries' economies first went into recession, the price of oil and gas remains stubbornly high. At the end of 2013, the price of a barrel of Brent crude still stood at just under $110 (€80) -- barely changed on the price at the end of 2012 and almost three times the level to which oil prices fell in late 2008.

Outside of North America, where fracking is transforming the market, natural gas prices remain at similarly elevated levels.

Why have energy prices remained so high in the teeth of the most severe global economic downturn since the Great Depression of the 1930s?

Part of the answer is undoubtedly the fact that while most of the developed economies have been in the doldrums since late 2007, many of the developing economies -- China, in particular -- have been going like gangbusters.

The continuing strength of the developing economies has fed through into their energy usage, with China now the world's second-largest consumer of energy, guzzling over 10 million barrels a day, the equivalent of almost an eighth of global output.

Now there are clear signs that the wheels are about to come off many of the developing economies. The current turmoil in Turkey, previously one of the star pupils in the developing economy class, may prove to be the shape of things to come in 2014.

Other developing economies are also showing signs of strain. Inflation has soared to 11 per cent in India and the rupee lost over 10 per cent of its value in 2013, forcing the country's central bank to increase official interest rates.

However, it is China -- which has overtaken Japan to become the world's second-largest economy -- that should have everyone worried. Since 2008, total Chinese lending has almost tripled, from $9 trillion (€6.6 trillion) to $24tn.

The so-called 'shadow banks', where the mainstream banks have parked much of their bad loans, are reckoned to be particularly vulnerable. What's the Chinese for soft landing?

At the same time as the emerging markets phenomenon is looking less and less like a sure thing, thus reducing energy consumption in these countries, global energy supply is increasing.

If the November 2013 deal on Iran's nuclear programme, which provides for a significant easing of sanctions by mid-year, sticks, then Iranian oil output could rise very quickly. Iranian officials are already talking of increasing production from the present 2.7 million barrels a day to 4 million.

And it could rise even further. Before the 1979 revolution, Iranian oil production was running at 6.6 million barrels a day.

An extra 4 million barrels a day (the equivalent of a 5 per cent increase in total output) coming on stream would have a major impact on the oil market. We can also expect a major increase in output from another major producer, Libya, in 2014. Labour unrest has seen production fall as low as 225,000 barrels in recent days, down from 1.5 million barrels a day achieved last spring.

And there's more. The fracking revolution pushed US oil output to over eight million barrels a day in December -- a level last seen in October 1988. And it's set to keep on rising, with the US Energy Department forecasting average US daily output of 8.5 million barrels in 2014. The department now expects average American daily oil production to rise by 800,000 barrels each year out to 2016.

Add up all of that extra Iranian crude, increased Libyan production and US shale and you are talking a lot of barrels -- perhaps seven million a day or even more, over the next two or three years. All of this extra oil will be coming on to the market at a time when most of the eurozone economy remains chronically depressed and many of the developing economies are looking distinctly ropey.

With supply up and demand down, oil prices can only go in one direction.

Of course, it could still all go horribly wrong. What are the chances of the Saudis, who would be among the major losers of any fall in prices, teaming up with their new best friends, the Israelis, to scupper the Iranian nuclear deal?

Vladimir Putin, whose political survival almost certainly depends on oil prices remaining high, would also have a vested interest in stirring the geopolitical pot. Lower oil prices would also strengthen German demands for higher ECB interest rates.

However, while there is many a slip twixt cup and lip, a major fall in oil prices could be just the shot in the arm that the barely recovering Irish economy needs in 2014.

Irish Independent

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