Oil prices drop amid storage capacity fears
October 26, 2015, 10:55 pm

United Arab Emirates Minister of Energy Suhail Mohammed Al-Mazrouei, seen here at an OPEC meet in June, predicts that demand – and oil prices – will rise in 2016, but some market analysts see further drops next year [Xinhua]

December West Texas light, sweet crude fell more than one per cent to $43.98 a barrel on the New York Mercantile Exchange, while global benchmark Brent fell just under a dollar to $47.54 a barrel at close of trading Monday.

The drop came partially due to warmer-than-expected weather in North America and much of Europe, leading to lower demand.

With demand lower than usual, there are fears oversupply will drop prices further down.

But United Arab Emirates Minister of Energy Suhail Mohammed Al-Mazrouei expects oil prices to fall into correction and steadily rise in 2016 due to increased demand.

“As far as OPEC is concerned and what we agreed, we are going to move to a market-driven price so supply and demand will dictate what is the right price for producers,” he said.

The Emirates, which was the world’s sixth-largest oil producer in 2014, indicated earlier in the week that it could boost oil and gas production.

This comes as Iran prepares to produce and sell several extra hundreds of thousands of barrels as sanctions are lifted following its nuclear deal with the West.

“We are not going to interfere with that mechanism. If you think about it, today the slowdown in certain types of production tells us the current prices are not the right prices for the long term – we need some more corrections upward for the prices,” he told local media on Monday.

The Emirati position follows decisions taken by the Organization of Petroleum Exporting Countries (OPEC) in the past year not to interfere in falling prices and refrain from cutting production output.

Supply is more than demand – the stagnation and recession in many Eurozone countries has forced industry and governments to scale back imports; oil prices are unlikely to rise considerably until the global outlook improves.

Even though oil prices are currently down by 60 per cent compared to the same time last year, one shouldn’t look forward to $11 a barrel – not seen since December 2000.

Asian economic giants and BRICS powerhouses China and India will be sighing some relief at the OPEC decision as both rely heavily on oil imports.

With both of their economies slowing down in 2014 and forecast 2015, the lower oil prices should give them reprieve to realign their budgets to deal with new economic realities.

Conversely, the decision to maintain output at 30 million barrels a day appears to punish Russia the most.

Already struggling under ever-tightening US and EU sponsored sanctions, Russia has seen its exports fall, markets close off, and most importantly the ruble dive since fighting broke out in Ukraine last spring.

Oil glut

But unless supply is cut by OPEC, Al-Mazrouei’s optimism may be misplaced if a warning by investment banking firm Goldman Sachs is to be believed.

In one of its reports on the health of the oil and energy industry, Goldman Sachs warns that with supply far outpacing demand storage facilities are at near saturation points.

“Distillate storage utilization in the U.S. and Europe is nearing historically high levels, following near record refinery utilization, only modest demand growth (especially relative to gasoline), and increased imports from the East on refinery expansion and Chinese exports,” the report said.

In order to get rid of over-capacity, oil prices will be driven lower to encourage market demand.

“This raises the specter of 1998 (and) 2009 when distillate storage hit capacity, pushing runs and crude oil prices sharply lower,” the report continued.

Such prospects are a headache for major oil companies who have slashed budgets, cut back in major investments, and fired thousand of workers in the industry in the past year.

The BRICS Post with inputs from Agencies