Non-OPEC production, global economy still a risk to oil prices

Expectations of Saudi Arabia not being able to meet resultant supply shortfall will also prop up prices

By MARK RAO / Pic By BLOOMBERG

Non-cartel production and a slowdown in the global economy remain risks to oil prices, potentially putting the brakes on the recent oil rally.

Brent crude oil has rallied approximately 52% over the past year to trade just short of US$85 (RM348.50) per barrel, chiefly riding on looming US sanctions on Iran which will put some 1.5 million barrels per day (bpd) offline next month.

Expectations that Saudi Arabia, the leading OPEC producer, will be unable to meet the resultant supply shortfall are also propping up prices.

While traders have already set their sights on oil reaching US$100 per barrel, reaching this lofty level needs a substantial decline in Iran oil exports; continued production disruptions in Venezuela, Libya and Nigeria; and strong winter demand for oil.

“Despite the recent price rally, we believe downside risks to oil persists,” Moody’s Investors Service assistant VP and analyst for corporate finance group Rachel Chua told The Malaysian Reserve (TMR).

“An increase in global production levels or weakened oil demands on the back of softer global economic growth would lead to lower oil prices,” she said.

Chua said Moody’s has a mediumterm price band of US$50 to US$70 per barrel on the West Texas Intermediate (WTI) index. WTI crude oil traded above the US$74 per barrel mark last Friday.

Production outside the OPEC agreement remains a threat to global oil prices, especially from US drillers.

US shale production is expected to reach 7.59 million bpd this month, while latest data from the US Department of Energy revealed a crude stock build-up of around 1.7 million barrels.

Reports of a Saudi Arabian and Russian-led production increase to offset lost Iranian barrels have also weighed on oil traders’ sentiment.

Meanwhile, prolonged US and China trade tensions continue to pose a threat to the global economy.

Oanda Corp head of trading for Asia Pacific Stephen Innes said oil markets remain in the bull zone despite the concerns.

“With a lot of the short-term speculator froth running for the exits, there is a tendency for longer-term players to revert to low ball bids knowing the markets will come to them,” Innes said in a report.

He said the Brent US$84.50 to US$84.75 support channel remains well bid and only a break of US$84 per barrel would suggest anything other than overnight profit-taking.

TMR reported last week that the higher oil price environment will encourage investments in offshore rigs as current crude price levels make these costly projects profitable.

Major oil firms are likely to increase their expenditure after years of prudent and conservative spending.

Chua said the current price environment should result in a pick-up in investments as oil and gas producers are incentivised to spend on development activities.

Despite recent optimism, the 2014 oil crisis which saw prices plunge from US$100 per barrel highs to about US$50 per barrel is a testament to the volatility in oil markets. Oil firms will keep this in mind as they pursue opportunities in the market.