It may be 2015, but oil prices are what they were during the Grand Recession: what will the new year hold for the ME's economies?

Published January 4th, 2015 - 04:05 GMT

Concern, anxiety, uncertainty and apprehensions are gripping the crude markets as the New Year begins. 

Oil markets plunged further — sinking below $53, a level last seen during the Great Recession —as sun was setting on 2014.

While Chinese economy was reportedly cooling — indicating a global slowdown — the US administration’s decision to open the door for expanded oil exports outside the US of the lightly processed form of crude known as condensate turned out to be the another proverbial nail in the coffin.

After a long period of intense political debate, the Department of Commerce in Washington announced approving requests to ship overseas processed light oil products. 

Analysts believe the move could lead to over 1 million barrels of ultra-light US crude entering the global markets.

“In practice this long-awaited move can open up the floodgates to substantial increases in exports by end 2015,” Ed Morse, global head of commodities research at Citigroup bank was reported as saying in the press.

Washington’s decision indicated a market share war was apparently on. Markets were not ready to absorb this jab. Prices had to plunge — and they did  — to new lows.

The latest decline in the crude price was also given a fillip by soft data emerging from China confirming that its industrial output shrunk in December — for the first time in seven months. 

The final HSBC/Market Purchasing Managers’ Index (PMI) for December came in at 49.6, down from 50.0 in November. And any reading below 50 indicates a contraction.

Adding to the pressure is the fact that US crude inventories last week reportedly rose to almost 13 per cent above the five-year average level of 343.1 million barrels for this time of year, the highest for the period in data going back to 1982, Energy Information Administration data confirmed.

How low could the markets go in 2015? Analysts are now perplexed. None can project with a certainty. 

Only guesstimates could be offered. In recent weeks, Minister Ali Al-Naimi, the wheeler and shaker of the global crude industry, has been underlining in rather clear terms: “It is not in the interest of Opec producers to cut their production, whatever the price is,” he told the weekly MEES.  

“Whether it goes down to $20, $40, $50, $60, it is irrelevant.” The momentum at this juncture, however, remains firmly to the downside. 

“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30’s. 

There’s no reason why it couldn’t happen,” Darin Newsom, senior analyst at Telvent DTN was quoted as saying by Matt Egan of CNNMoney.

“It really is pretty mathematical. There is more oil than we need,” Tamar Essner, energy analyst at Nasdaq Advisory Services told Egan.

Consequent to all these developments, the fear premium too has gone down —considerably — if not eradicated. Energy markets are no more itchy at the slightest hint of political tension in the oil rich region.

Way back in 2011, when Libyan outage first hit headlines, markets went scary. Fear premium started creeping up and indeed rapidly. 

Not today any more. Libyan output is once again at the scary low level of around 300,000 bpd against the regular 1.5/16 million bpd. 

Energy Aspects Ltd. estimates Libyan output to have fallen below 300,000 barrels a day, the lowest since May, after militants shifted attacks to energy facilities, including the country’s largest oil export terminal. 

Yet the markets are taking the development in their own stride. The panic that one witnessed in 2011, as energy ministers and leaders gathered in Riyadh to discuss the Libyan outage, is nowhere to be seen today. 

Today is a different world. Calm is reigning in and environment has changed — rather drastically.   

Tom Kloza, global head of energy analysis at the Oil Price Information Service also is not too optimistic. 

“If panic hits those financial companies that have a lot of exposure to oil on the upside, the numbers you may think are burlesque or hyperbole like $35 or even $25 suddenly become real possibilities, if only for a brief period of time,” Kloza told CNN. “Anything can happen in 2015.”

Many analysts now feel, that the current market behavior is the manifestation of the existing market fundamentals today and no immediate correction is on horizon. 

Jeremy Warner writing for The Telegraph  feels that the current dip in oil market prices is not a short term scenario, rather he underlines that oil price will remain low for a long time, sinking to perhaps as little as $20 a barrel over the coming year before recovering a little.

Because of a change in the supply model, this is a fundamental shift that will likely have long-lasting effects, says Mohamed El-Erian while writing for Bloomberg News.

Through the years, markets have been conditioned to expect OPEC members to cut their production in response to a sharp drop in prices. Saudi Arabia played the role of the “swing producer.”

However, in serving as the swing producer through the years, Saudi Arabia learned an important lesson, too: It isn’t easy to regain market share. 

This difficulty is greatly amplified now that significant non-traditional energy supplies, including shale, are hitting the market.

“That simple calculation is behind Saudi Arabia’s insistence on not reducing production this time. Without such action by the No. 1 producer, and with no one else either able or willing to be the swing producer, OPEC is no longer in a position to lower its production even though oil prices have collapsed by about 50 percent since June,” Erian underlined.

And then he argues that this change in the production model means it is up to natural market forces to restore pricing power to the oil markets. 

Low prices will lead to the gradual shutdown of what are now unprofitable (or inefficient in the words of Minister Naimi) oil fields and alternative energy supplies, and they will discourage investment in new capacity.  

At the same time, they will encourage higher demand for oil. This will all happen, but it will take a while. In the meantime, as oil prices settle at significantly lower levels, economic behavior will change beyond the “one-off” impact, he argued.

Oil markets stand much altered today. Although prices may go up, especially in the second half of the year, the fact remains that fundamentals are controlling the markets today. 

And the fundamentals are in for a long haul. A new era has dawned. And the markets are beginning to learn it rather the hard way.  
A new equilibrium will indeed be struck — at some point in time — yet that is some way off, one could now say with some certainty.

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