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Rediff.com  » Business » Abundant supply keeps oil prices low

Abundant supply keeps oil prices low

August 26, 2014 09:14 IST

A worker at an oil rigThe fact that Brent crude oil prices have fallen to $101 a barrel, the lowest in about a year, despite crises in a number of oil-producing countries in West Asia and the standoff between Russia and Ukraine, comes as major relief for India.

This is because about 85 per cent of its oil requirements are met through imports.

In this year’s estimated oil requirement of 223.7 million tonnes (mt), the share of imports is projected at 188.2 mt.

India is the world’s fourth-largest importer of natural gas, accounting for six per cent of the global market.

Comfort on the price front notwithstanding, petroleum ministry officials see merit in the observation of Paris-based International Energy Agency, which has said the oil market has remained “almost eerily calm”.

The eeriness is principally because of two reasons: First, in case Russia, provoked by Western sanctions, switches off oil supplies to Europe, it could be a trigger for prices to rise.

Second, so far, it appears unlikely the conflict in Iraq will have a bearing on exports from its southern oilfields, which account for most of the exports of the second-largest producer in the Organization of the Petroleum Exporting Countries.

But in the unlikely event of disruptions in supplies from southern Iraq, prices will rise sharply in the absence of “spare capacity” elsewhere in the world.

These are, however, speculations.

As of now, due to abundant supply in the face of geopolitical risks, the benchmark oil price has fallen 12 per cent from the year's peak of $115.71 in June, coinciding with the new wave of disturbances in Iraq.

That the market has been calm despite disturbances in more than one oil-producing country is proof the world has moved from the time when conflicts in West Asia, home to 48 per cent of the world’s known oil reserves and 38 per cent gas reserves, were synonymous with soaring energy prices.

In fact, as the market remains focused on easy supply, trade officials don’t rule out further downside risks to oil prices.

At the same time, oil & gas prices are likely to get support once the winter sets, in October; the more severe the winter, the greater will be the demand for oil and gas.

Now, however, the market has to contend with weak refining activity in industrialised countries in the face of improved global supply of oil, a sharp fall in Chinese crude oil imports in July and growing speculation the US riding the crest of a shale oil boom will lift the ban on crude exports, in place since 1979.

According to the International Energy Agency, global crude oil supply rose by 230,000 barrels a day in July to 93 mi
llion (m) bpd.

The rise was due to Opec, which pumped in an additional 300,000 bpd to a five-month high of 30.49 mbpd.

This helped offset the shortfall in supply by non-Opec producers.

IEA says, “While the situation across key producer countries remains more at risk, so far, the market appears confident Opec can deliver the production increase needed to meet the rising demand expected in the second half of the year.”

De facto leader Saudi Arabia, which raised production by 280,000 bpd to 10.1 mbpd in July, has been successful in keeping Opec on the right track despite crude oil prices softening.

Civil war-torn Libya has in, a short period, doubled production to 430,000 bpd.

Saudi Arabia’s task of maintaining discipline in Opec ranks has become easier, as the US’ progress in oil production -- up about 50 per cent to 8.5 bpd in July through the past three years -- and the consequent fall in imports has a message for all producing countries.

Also, there are near-record quantities of crude oil stored, from which the US could export in demanding circumstances.

Ahead of the lifting of the export ban, the US, as a ‘special case’, allowed a tanker with $40 million of ultra light crude oil to set sail for South Korea from a port in Texas; this could herald a new order in oil trade.

The speed at which production in the US is rising, the country would soon be in a position to export at least 800,000 bpd of light crude oil.

Kunal Bose
Source: