GEO ExPro

Oil Prices Under Pressure

They should rise with accelerated growth in the second half of the year
This article appeared in Vol. 10, No. 3 - 2013

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Oil prices came under heavy pressure in the first weeks of April. Weaker-than-expected macroeconomic data from the US and somewhat disappointing growth figures from China in the first quarter contributed to this. But we are in a period of the year when the oil market is usually somewhat slacker, when demand for oil products is typically low. This year, the seasonal effect was especially noticeable because more refineries than usual shut down production for maintenance work. By the beginning of May, oil refineries are normally out of the maintenance season, leading to a sharp increase in refinery runs and thus a boost in the demand for crude.

The rate of growth in the world economy is expected to bottom out in the second quarter of this year, only to increase slightly as we move into the second half of the year. US budget constraints are expected to dampen economic growth in the current quarter. Growth in China and the US is expected to pick up somewhat in the latter part of the year and recession in the Euro zone should be over by then.

Downward pressure on prices based on the situation in the physical oil market has meant that the scope of bets in the financial section has fallen, approaching the level we saw last year when the crisis in Europe was at its highest. Increased uncertainty contributes to the financial speculators’ wishes to sell out of the oil market, leading to exaggerated downward reactions in prices.

Downward pressure is less now than last spring, when Euro-related turmoil raged, investors shunned risk-related investment classes, and Saudi Arabia flooded the market with oil. Prices bottomed in June at $89/barrel and many fear a similar dive this year. Sustained oil prices around $80 per barrel could, for example, dampen investment activity on the Norwegian Shelf. In my opinion, however, it would take even more unfortunate circumstances before this might happen.

Growth Uncertain

There is uncertainty linked to the growth outlook in the world and thus to the demand for oil. Growth in China is only slowly picking up again, as it struggles with unsettling financial imbalances and structural problems. A significantly lower growth in the Chinese economy than the assumed 8% would contribute to a lower oil price of a longer-lasting character.

Much attention has been paid to the rise in potential oil production, which appears to be higher than the growth in demand. The rapid production recovery in the US and Canada is, however, offset by production disruptions in other key producing areas. The security situation in Libya is worrisome and the growth in oil production there has stopped. In Nigeria, militant attacks on oil installations in the oil-rich Niger Delta are increasing. Furthermore, the continuing war in Syria represents a threat to stability in the entire Middle East, including in the major oil-producing countries of Iraq, Iran and Saudi Arabia. The conflict over Iran’s nuclear programme is also equally entrenched and unrest has flared up after the presidential elections in Venezuela. There is therefore considerable uncertainty related to the supply side of the oil market.

I therefore believe that the large correction downward in the price of oil is behind us, and expect prices to rise again as the world economy gains momentum in the second half of the year.

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