The current rise in the oil price to above $60 per barrel is only temporary - the Barclays oil research team expects further pressure in prices going into Q2 2015.
Our forecast is that crude oil will average just above $40 a barrel in the first half of 2015 - it may even drop to near the $30/b mark at times - and will pick up in the second half of the year, averaging around $46.
The reasons for these moves, the responses of suppliers and consumers, and the implications for Africa and its commodities, are among the issues the Barclays team will be discussing at the upcoming 4th Annual Trading Africa Summit in Cape Town in March 2015.
The fact is that the oil market has undergone a transformation which may not yet be complete. Prices halved from over $100/b in mid-2014 to under $50/b in January 2015, a surprise development which caught governments and markets unaware.
It has now begun a slow recovery, reaching $60/b in mid-February. The reason we believe this recovery is not sustainable, and that prices will once again decline in 2015, is that there is a continuing oversupply, which we estimate to be about 1.1 million barrels a day. OPEC nations are not cutting back, despite the oversupply, and oil prices will weaken until increased demand lifts the market.
We now expect a long period of oversupply stretching at least into early 2016, with prices averaging $55-$60/b next year.
It’s a price war. The OPEC nations have essentially said that they are the lowest cost producers and do not believe they should shoulder the responsibility for the high-cost, inefficient producers (i.e. the US and the other North American producers). OPEC countries are prepared to let the oil price drop in order to force out the inefficient producers and bring about what they would view as a much more efficient oil market.
The huge daily oversupply of oil is not being consumed, so it has to be stored. Much of the world’s on-shore storage has already been committed, and demand is moving to floating storage - the massive oil tankers which would normally transport oil.
One facility that has additional capacity is at Saldanha Bay in South Africa. Since August last year, 19 million barrels of crude has arrived at Saldanha Bay, with 73% of it coming from West Africa. So far, only about 1 million barrels has left this storage terminal. Saldanha Bay has 45 million barrels of storage capacity and we expect more of this capacity to be filled in the first quarter of 2015.
What is also happening is a change in the swing producers - those who influence the market, not necessarily those who produce the most oil. The traditional swing supplier has been Saudi Arabia, but for the moment they no longer want this role. So it’s moving to the United States, where producers are independent, scattered and not co-ordinated.
In the event of a price shock, Saudi Arabia could open the oil taps within 30 days, whereas it would take US producers 60 to 90 days to react.
These developments have interesting implications not only for the oil industry, but for other commodities - diesel is a huge cost input for much of the mining industry - and for gas exploration in Southern Africa if these low oil prices continue.
One of the issues the Barclays team will be exploring at the Summit is the potential for producers to curb supply in order to support the oil price. There are a lot of assumptions that Saudi Arabia will continue to maintain market share rather than increase it. But there’s also a huge potential that they could boost production, and bring all of their oil onto the market rather than keep some of it under the ground.
And that would have a dramatic effect on oil price expectations.
*Miswin Mahesh, oil markets analyst at Barclays in London