Jan.
22
2015

Oil price – it is not conspiracy nor politics

For the second half of the year, an average price of up to 70 dollars a barrel is predicted on the world market of oil by Denton Cinquegrana, senior oil analyst of the New Jersey based, most authentic (oil) price and value analysis and advisory company, the Oil Price Information Service (OPIS). In the interview he gave to the Alapblog.hu he says that arguments which see conspiracy behind the events of the last months are unreasonable. The OPIS believes that the United States becoming net oil exporter and the third largest oil-producer in the world, and the shale oil and gas revolution bear more significance. In the next couple of months we will see that somewhere the price of crude oil falls below 40 dollars a barrel, but around summer, prices will start to rise. However, this rise will not continue to the 100 dollars range, like in the last half year.

Péter Zentai: I assume, you are travelling by car. How much did you pay last time for a gallon of petrol in New Jersey?
Denton Cinquegrana: 2 dollars 22 cents. However, the average price of a gallon was 2 dollars 19 cents last week in the United States.

Is it going to be cheaper? Can this lower than the European price fall even further?
According to our forecasts, it will reach the bottom at 2 dollars at the American stations. In Texas, it will go under 2 dollars. Anyway, we are it is getting closer to our predicted minimum. Then comes the turnaround.

Have you been calculating with the oil price rise? When is it going to happen?
Not in the next couple of months. But we are sure that in this year, in the second half year there will be serious movements on the markets – upwards.

Now it is somewhat below 50 dollars a barrel. Where will it go after six or seven months?
In the United States the indicator is the Texan (Texas Intermediate) crude oil which is around 44 dollars, and Brent, better known in Europe, is 49-50 dollars a barrel. We forecast a further maximum of 5-8 dollars fall for both. According to our analysis, Brent will not drop under 40 dollars. We predict the world market average price to be around 65-70 dollars for the next half year.

Why would prices start to rise? The economy of China is slowing, Europe is stagnating, and as far as I know, hydrocarbon extraction is not decreasing, while world economy progresses by less energy-intensive technologies…
Because the never seen before fall of oil prices – from 108 to 53 dollars a barrel, in the case of Brent – from July to early December was fairly overreacted.  It includes the European stagnancy, European financial problems, changes in deflation, the Chinese slow-down, and the overestimation of the significance of global overproduction.

The national economies of Europe will perform better than expected; however, the Russian geopolitical crisis – according to our predictions – will stabilise rather than deepen. The most significant catalyst of the recent price drop was that a highly anticipated event did not take effect! The majority of market participants were expecting Saudi Arabia to restrain production. Then, at the OPEC (a ring like collection of mostly Arabian and Latin-American oil producer countries) meeting in November, the number one exporter said they have no intention to contribute to the stabilisation or increase of world market prices by holding back their production. In this country, the extraction of a barrel of oil does not even cost 20 dollars, while in Canada, it is between 60-90 dollars and in the North Sea the average is 50 dollars.

From this point, not only the price of oil started to dive, but the shares of every significant companies of the energy industry as well. Drops of 15 – 20 percent on the stock market within a couple of weeks!

Besides – while we are speaking – it can be noticed that the demand for the stocks of such companies and tankers is remarkably growing. So the market sends signals of the next half year’s increase of oil prices.

So you do not know about any collusion between the United States and Saudi Arabia? We can read about such conspiracies in global media, that by decreasing prices to the extremes, the two major oil market powers have tried to bring to heel the Russian, the Iranian and the Venezuelan regime – since these systems pose a threat to the western, mainly American and Saudi Arabian interests…
Keeping the extraction of shale oil and shale gas at a profitable level is also an American interest. If we looked at this way, such collusion would seem like that the United States is working against itself. Numerous other western interest-groups come out badly by the falling prices: it is bad for the expensively extracting Alaska and for other developing oil regions in the United States as well. Furthermore, it is bad for Norway, and not to mention the losses that the large companies in energy industry have suffered. So, we do not believe in conspiracy-theories.

The only defining factors in the development of oil prices are the current and probable demand and supply ratios.

Such factors have significant impact such as in the last week in the United States, oil reserves increased by 8 million barrels instead of the predicted 3 and half million and as for diesel and oil fuel reserves, they increased by five times the predicted, 12 million barrels.

Meanwhile, here in the United States and in every other major oil field companies have to continue full scale extraction without regard to falling prices, the cannot decrease or stop drilling, refining and processing.  They have to profit from investments started last year when the prices were high. Oil companies usually spend most money before they can sell the first drop of oil, so it is in their interest to run new investments non-stop. Cash-flow is much more important for them than some kind of speculative stockpiling. According to our calculations, it is going to take further 6 months to be possible to somewhat decrease production. This waiting, in relation with the predicted rising prices for this year, starts to – if not significantly – build into the futures prices. Everyone, every player looks for an opportunity to join in.

Do you agree with me if I say that the most significant generator of developments in the oil market is the United States? I mean in the technological revolution of shale gas and shale oil extraction…

Absolutely. The sudden, radical increase of the American extraction – including shale gas and shale oil becoming a market factors – and the authorisation of oil export on a broad scale by Washington, is an enormous strategic blow on the OPEC members and Russia. Even though, we believe a rising tendency of prices is inevitable in the second half year, we are sure that the increasing American presence in the market is what limits the rate of price increase. We think that within a foreseeable time, it is impossible that prices – even for the most expensive oil types – would reach 100 dollars again.

Geopolitical challenges which are unpredictable as well? Wars, for example?
In the last years, geopolitics had more significant effect on the development of oil prices. It was built into the prices, suppliers and buyers both accepted the ‘fear premium’, which were politics and global politics. The major area of extraction was the Arabic with its every uncertainty. However, today this geopolitical vulnerability in energy supply – mainly crude oil and natural gas – is discontinuing. This is due to the fact that the United States has become the world’s third most significant oil extractor and its role in oil supply could increase even further. The United States is also a pioneer in the development of shale-technologies. So the development of the realistic market supply and demand relation is what determines the price of oil. Right now, there are no significant market-affecting factors other than when and where a global economic recovery which is able to decrease overproduction is expected.

It looks like the market won over politics…