Oil trading volatile on oversupply concerns

January 12, 2016, 12:53pm

BBC News
Photo: Getty Images on BBC News

Oil prices have been volatile again, hit by continuing oversupply, the strong dollar and weak global demand.

Some members of the Opec group of oil producers are calling for an emergency meeting to discuss reducing output. Opec president Emmanuel Ibe Kachikwu said an extraordinary meeting could be held in "early March".

On Tuesday, Brent Crude fell as low as $30.44 per barrel before recovering to trade 25 cents, or 0.8%, higher at $31.80 per barrel.

Meanwhile the US benchmark contract, West Texas Intermediate was 9 cents, or 0.3%, higher at $31.50 per barrel. Oil prices have already fallen 20% since the start of the year and are close to levels not seen since 2003.

Fresh review?

Opec members are not due to meet until June, having previously met in December, but the deterioration in the oil price has prompted calls from several members for a fresh review of quotas.

"We did say that if it (the price) hits the $35 per barrel, we will begin to look (at)... an extraordinary meeting," said Mr Kachikwu, who is also Nigerian minister of state for petroleum resources.

He said that "a couple" of countries had been pushing for a meeting, but would not say which those were.

Much will depend on Saudi Arabia, which has resisted calls to cut production.

"Saudi Arabia has never held the position that it does not want to talk. In fact, it was very supportive of a meeting before June, at the time when we held the December meeting, if (there was a) consensus call for it," the Opec president said.

Saudi Arabia is keen to maintain market share even in a declining oil price environment.

Producer pain

But the lower oil price is hurting smaller oil producing nations, such as Nigeria, Algeria and Venezuela, which are all suffering heavily as the price of oil is no longer high enough to cover the cost of production.

Lower oil prices have also had an impact on Saudi Arabia. It announced a budget deficit nearing $100bn (£68.4bn) for last year prompting tax hikes within the Kingdom.

Saudi Arabia also said it was considering listing state oil company Saudi Aramco on the stock market, in an effort to raise cash.

"The near-term outlook for the oil market is bleak," said market analysts Jefferies.

"Opec is producing flat-out into a market that is oversupplied by over one million barrels per day; already decelerating demand growth could further decay with slowing economic activity; and OECD inventories that are already at record levels are likely to expand through at least the middle of the year."

Oil is so oversupplied globally that countries are running out of storage.

The US, which is thought to have among the largest oil storage facilities in the world, has nowhere left to store it, according to Paul Stevens, professor emeritus at the University of Dundee and a Middle East specialist.

"Storage is pretty much full and people are already talking about buying tankers as floating storage," he said.

"But if supply continues to outstrip demand, then the only thing that you can do with the oil is sell it, which inevitably pushes the price down."

Oystein Berentsen, managing director of crude oil at trading company Strong Petroleum cited the strong dollar as a factor in falling oil prices, although he added that the basic price driver was oversupply.

"Once the crude surplus turns into a product surplus and we start running out of storage capacity, there will be even more pressure on prices and an imminent collapse," he added.

Why is the oil price so low?

Oil prices have fallen by about 70% in the past 18 months, as supply has outstripped demand. The demand for oil from China has fallen as its economic growth has slowed. Meanwhile supply has increased, partly due to the influx of US shale oil. In addition, the world's largest exporter of oil, Saudi Arabia, has refused to cut production - something it has done previously to support oil prices. Analysts estimate that, at present, about one million barrels of oil are being produced above demand each day.

Who benefits?

Consumers and some businesses have benefitted from lower oil prices. UK motorists have seen the price of petrol and diesel fall from about £1.40 a litre 18 months ago to about £1 now. Haulage firms and airlines should also be benefitting from cheaper fuel. The lower fuel costs have also helped to keep inflation close to zero in many countries

Who suffers?

Oil exporting nations that rely on a higher oil price to break even are suffering, such as Russia, Nigeria and Venezuela, as are oil firms generally. There have been thousands of job losses in the North Sea's oil industry. Investment in exploration has also been cut by big oil firms such as Shell, BP, Total and Exxon Mobil.