Dec 04, 2020 Letters
This is in response to an article titled, “Exxon has lowered outlook on oil prices for much of the next decade – WSJ report”, published in another newspaper on November 27, 2020. Based on the contents of that article; in 2019 Exxon changed its prospects on oil prices by cutting its forecast for each of the next seven years (2020-26) by 11 percent to 17 percent for the future price for the commodity, averaging around US$62 per barrel for the next five years with predicted increase to US$72 per barrel by 2026-27.
Thus, it is of the view that Exxon was too optimistic with oil prices and as such, their forecast rendered being somewhat unrealistic for the period for the commodity. In keeping with the oil industry dynamics and oil prices projections, I would like to share some fundamental takeaways on WTI crude oil prices, which I did as part of a research project.
“The market analysis of Western Texas Intermediate (WTI) crude oil prices over the past two decades has revealed that numerous factors have influenced oil prices and the connecting physical stock conditions as well as other trading factors for the commodity including the global financial stock market. Additionally, from the oil market standpoint; there are a few principal factors that can heavily influence oil prices as follows:
1) Supply of the commodity by Non – OPEC countries namely; Brazil, China, Canada, Mexico, Norway, Russia and Unites States (7 x countries)
2) Supply of the commodity by OPEC countries namely; Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela (15 x countries)
3) Balance of the commodity on the global market
4) Spot prices
5) Financial markets
6) Demand by Non – OPEC countries
7) Demand by OPEC countries
Each of these factors contribute to the constant fluctuations in the levels of supply and demand for crude oil which in turn affect prices and where at times is not an accurate reflection of the balances between supply and demand for the commodity on the global market. On account of this position, which is influenced by these various conditions in effect present difficulties in modelling the aggregate of crude oil as it is not an easy process due to price fluctuations, which in both short and long terms can be unpredictably and may also be influenced by other factors on the global economic spectrum.
Over the past two decades, crude oil has been experiencing levels of uncertainty due to rise and fall in the supply and demand and, stock balance greatly affecting prices. From the Asian Financial Crisis in early 1999 coupled by Iraq increased in oil production, which resulted in oil prices reaching rock-bottom price of US$24. However, by the late 2000 the oil market recovered from its low of US$24 to reach US$34. But this rebound of crude oil prices only scored until early 2002 when again falling prices propelled another spell of economic fragility and uncertainty for the commodity. This level of oil price volatility was further augmented by the ‘dotcom-bubble’ between years 2001 – 2002. Thereafter, the global economy started to accelerate which resulted in a few years of bullish market with the corresponding hike in the prices of oil and as a precursor for the commodity. This favourable position for oil prices was further braced by intrusive factors, which included limiting the amount of oil supply on the world market and the United States hostile relationships with a number of oil producer-countries. In the year 2008, oil price reached an all-time high of US$147.30 at the acme of the global financial crisis fuelled by the crash of the United States housing market (bubble burst) which started to drastically retard and led to an unprecedented credit crisis, which affected cash circulations and the stock markets. Eventually oil prices suffered a dramatic decline, which was refractory to model even though at times oil prices exhibited a rebound after 2008 financial crisis. This situation continues to be perplexing after one decade of an all-time high of US$147.30 per barrel. Oil price still presents a challenge to find an approach from within the main methods that will forecasts’ prices with the degree of consistency and accuracy to the extent that reliance can be assured, however, this phenomenon is as of a result of the global dynamics in the oil industry, commodity market and unpredictable trading trends in general”. (Ramrattan, P. January, 2019. Research Methods Dissertation., pages 7-8. Chartered Banker MBA.)
WTI Crude Oil Price Forecast and Closing for 8 February 2019
Modelling Projected Oil Price Settled Oil Price Low High
Standard Deviation US$54.31 US$52.72 US$52.08 US$52.99
Standard Error of Estimate US$55.90
In as much as the forecast was above range for the day’s trading, the proffered position was that oil prices will move from low US$50s to mid US$50s per barrel for 2019. It was never the view that oil prices will reach levels of high US$60s-70s per barrel within the next five to ten years. In actuality, the closing price for WTI crude oil as of December 31, 2019 was US$61.06.
Even the global outlook was not too optimistic about future oil prices as per summary:
“In December 2018, oil price decreased at around $8.00 per barrel; however, it is noteworthy to mention that from mid-October 2018 oil prices started to decline. This was propelled in the wake of the global financial turmoil and economic uncertainty. WTI crude oil opened the quotations at $53.35 per barrel and closed off trade at $45.41 per barrel. On October 3, 2018 oil prices reached its 4-year high at $76.22 per barrel then a steady dropped in prices to close off the year at $45.41 per barrel.
This phenomenon was of the result of several factors as follows:
1) Supply of the commodity – According to data published by the US Energy Information Administration, trading stocks of crude oil increased from 395,989,000 barrels on September 21, 2018 to 426,004,000 barrels on October 26, 2018. This excess of oil on the market was of a direct result of planned maintenance works on refineries which caused a slowdown for the commodity market as crude oil levels stocked up during the maintenance period.
2) Demand of the commodity – Indicators from the International Energy Agency Monthly Oil Report (October 12, 2018.) Estimates were cut for 2018/19 oil demand growth by 110,000 barrels per day to 1,300,000 barrels per day and 1,400,000 barrels per day respectively for the years. This measure was instituted as a result of the rising threats over the global economy on account of: (trade war, tariffs, high oil prices, and the appreciation of the US dollar that could affect emerging countries.)
3) Financial dynamics – In accordance with the US Commodity Futures Trading Commission data, the net long position – that is the difference between the bullish and the bearish bets fell by 14 percent in the week to October 6, 2018 for the commodity.
In addition, the World Bank expects oil price to average $67.00 a barrel this year and next year down by $2.00 compared to projections from June 2018 as a result the global economic prospects which are on the negative side for the world affairs. This led the bank to revise its oil price projections and revealed signals of uncertainty associated oil price trends for 2019 and that global economic growth is expected to slow to 2.9 percent this year from 3 percent in 2018 as world trade and investments dilute. And, to further expand on this note, oil prices were volatile in the second half of 2018 with sharp plunges toward the end of the year. This scenario was primarily due to supply – side factors:
1) Oil prices average $68.00 per barrel slightly lower compared to the World Bank forecast from June 2018 but 30 percent higher than the average price of oil in 2017.
2) Producers have agreed to cut supply by 1.2 million barrels per day for six months starting January 2019. This measure to stem output may prove to be insufficient in order to reduce the oversupply of stock levels.
3) Another sets of key uncertainties for oil prices will be the impact of the US sanctions on Iran when the waivers end in early May 2019 and as well, for production in Venezuela which has been in steady decline over the past two years.
4) Crude oil output in the US is expected to rise by a further 1 million barrels per day in 2019.
Based on these various analysis and views, it is believed that the long-term oversupply of oil is inevitable, however, optimism is still shared that oil price will gradually increase to finish 2019 trade around 5-10 percent above January opening prices”. (Ramrattan, P. January, 2019. Research Methods Dissertation, pages 12-13. Chartered Banker MBA.)
“Based on the present market balance it is anticipated that oversupply of oil can be strong in 2019. Current oil prices are roughly at $50.00 per barrel (WTI Crude) and a continuous oversupply of the commodity could have an enormous effect on present prices.
According to IEA predictions for 2019, should oversupply match their forecasts that would cause oil prices to slump to channel lows of less than $30.00 per barrel.
In gaining momentum, it is believed that 2019 oil market will react to decisions of OPEC members coupled with Russia’s agreement to cut production by 1.2 million barrels per day for six months starting early 2019 and Saudi Arabia also cutting production. With the present oversupply of the commodity, OPEC could very well effectuate drastic production cuts in order to level out this oversupply which could propel a slight increase or stabilization of current prices. It is noteworthy to mention, even though OPEC and Russia still control 40 plus percent of the global oil supply, should the US increase its oil production that could impact the global oversupply balance resulting in OPEC’s ability to control the oil market. However, should oil prices slump that condition can decrease US shale production which could act as a catalyst for OPEC in controlling the oil prices”. (Ramrattan, P. January, 2019. Research Methods Dissertation., page 14. Chartered Banker MBA.)
Further, the current US sanctions on Iran and Venezuela, which have had an impact on the market, should always be considered as part of the equation since this mutagenicity can adversely affect oil prices:
1) Iran – should the US sanction be lifted. Iran will increase its production and sales.
2) Venezuela (once the world’s fifth largest exporter of crude oil) – should the US removed its sanction, Venezuela will restart production and sales
In the event, these two oil giants’ producer-countries get back on stream with their oil business, the world can very well witness oil prices tumbling downwards into US$20s per barrel and that price range will probably remain so for the next decade.
In concluding, Guyana should take note of the foregoing and just not sit and wait on high oil prices to bounce back to cushion our meagre earnings as per our PSA agreement with ExxonMobil, we need to renegotiate for a better deal in order to capitalize on current market trends.
I will eat a piece of Exxon Christmas Cake with your ingredients inside.
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