Over the last eight months, the price indicators of crude oil and natural gas prices showed a tremendous fluctuation, while experts and economists have been doing their best to predict and analyze this important commodity that affects people’s lives. However, positive economic news has been spurring the recent crude oil rally that brought prices back up from $50
Investors operate on the hopes that the global economic situation is on mend and correction. However, negative news appeared as U.S consumer index showed waning confidence and frustrated optimism. The Consumer Confidence Index (CCI) measures the monthly degree of optimism on the state of the economy, which consumers are expressing through their activities of savings and spending. In last June, the CCI was 49.3 and fell to 46.6 in July. Gene Mcgilian, analyst with Tradition Energy in Stamford, pointed to investors’ expectations about an economic recovery as the reason why the price of oil has been so volatile lately. “The real thing is how the current outlook is for energy versus what we expect to see happen in 6-12 months continues that’s why we keep swinging around $ 12 to $ 15 every 6-7 weeks”.
But, we can say that governments are now aware about the dimensions of the crisis and they are working hard to put quick and long-term solutions to absorb the shock and avoid such crisis. Global banks commenced to correct financial situation and change policies and executives as well. Restructure of financial associations and industrial sectors are inevitable during this period to restore lost confidence among consumers who are the backbone of economy.
Trading on Optimism
Positive news about the economy encourages investments in the crude oil market, as they believe that with this improved economic situation comes to an increased demand for oil, but the market still managed to go up from basically $50 up to $73. This is due to some contributing factors that can really push oil prices along based on converting investors’ optimism into an economic recovery reality, such factors include:
- USA, number one crude oil consumer worldwide, (use about 20 million bpd), is always interpreted by petroleum information centers and specialized institutes to predict and analyze data relevant to crude inventories; for instance, when data shows an increase in stockpiles, crude price automatically decreases and so on.
- Saudi Aramco, the world’s largest oil company in terms of proven reserves, started to intensively increase its offshore activity. Since last June, the company has 23 jackups contracted for work in Saudi Arabian waters. Furthermore, the number of contracts signed in the last year has dwindled, but that may be part of strategy, rather than lessening in activity. The only contract signed by Aramco in 2008 was an extension of the already contracted Arch Rowan. Yet, this pattern of a busy year followed by a slow year would help the company to be ready for signing a number of new contracts at the start of 2010, given that the company has openly expressed its plans to increase production and focus on its offshore fields.
- China, the second world consumer, has successful chances in Africa, South America and Kazakhstan in exchange for long –term crude supplies, for that reason, during the past six months, China has lent more than $45 billion to Russia, Brazil, Venezuela and Kazakhstan to secure the supplies. China is a leading player in the recent global rush for oil and now depends on imports for more than 40 percent of its oil, expected to rise to 75 percent in 2030. China has imposed its hands on many foreign oil deposits in the past two years, including some in Africa. China won oil interests off the coast of Angola after persuading that African country with $2 billion credit line, also made the $2.27 billion purchase of a stake in the Akpo offshore oil and gas field in Nigeria, which has a production capacity of nearly 225,000 boepd. Moreover, China secured four oil-drilling licenses from Nigeria (the first oil producer in Africa) and Angola (the second oil producer) in addition to six other countries. The ratio of crude oil imports from Africa to china reached 30 percent. Currently, China focuses on Nigeria, Angola and Sudan.
- Japan has recently entered into race with China for African oil; nearly 90 percent of its needed oil comes from the Middle East. Japan’s Ministry of Economy released a new long-term strategy aimed at ensuring stable oil, gas and other energy resource supplies. Last October, five Japanese enterprises won international tenders to acquire the rights to develop a combined six oil blocks in Libya, the deals marked the first oil exploration concession ever given to Japanese firms in Libya.
West Africa draws attention
West African countries are capturing the attention of the big global oil companies to fight for its offshore fields more than oil from other parts of the world. The move toward Africa as a source of oil “will not only reduce dependence on Middle East oil but will also reduce the leverage that Middle East oil-producing countries exercise on the global economy”. There are four reasons for the strategic significance of West African oil:
1- The oil off the West African shore can be loaded from offshore and shipped easily without transshipment cost through the Atlantic Ocean to the U.S. Offshore exploration also acts as a buffer for any political instability.
2. West African oil is low in sulphur content. Consequently, it provides high gasoline yield, which is the preference for American refineries that operate under strict environmental laws.
3. The political risk in West Africa is its underdevelopment and culture of bureaucratic corruption. These factors have greatly contributed to its inability to manage its own affairs. Yet, this political risk is minimal compared to the Middle East.
4. West Africa is not the subject of combative political culture (radical Islam) and neither is it a ground for competing ideologies such as communism.
For these reasons, West Africa presents a prime location for heavy U.S. investment. In the short term, this offers the U.S. the solution to the problem of a growing domestic demand for oil, set against the troublesome backdrop of the political situation in the Middle East.
The militant activities in Nigeria have severely affected the daily production of crude oil by one million barrel of oil in Niger delta crisis, despite it has potential production capacity of 3.2 million bpd, and the current quota is about 1.7 million bpd. Such loss affects quietly the total global production that is why global companies rush their plans to explore in other emerging west countries like Ghana, Togo, Uganda, Cameron and Gabon. These countries have ambitious plans to increase their revenue and they find support from developed countries specially U.S. and lately the IMF approved a $602.6 million loan toGhana on July 15 to help the West African nation tackle budget imbalances. The loan is the largest IMF financing package to date for an African country during the current global financial crisis. This loan synchronizes with the agreement made between Ghanaian government and group of international oil companies. The Jubilee Field (found by American companies), the most promising find, is estimated to hold at least 650 million barrels of recoverable oil, with estimates going as high as two billion barrels of oil. The operators expect Jubilee to produce about 120,000 bpd by the second half of next year.
The sixteen West African Countries are the terminal for U.S. and other developed countries specifically China trying to find proper chair on the banquet. The next two years will clarify the glimpses of this race believing that U.S. will gain too.
Natural Gas slides
Natural gas demand observably fluctuates on a seasonal basis, falling in summer and rising in winter. Seasonal discrepancies, like cooler summers or warmer winters, can dampen this effect and change the amount of gas demanded on a large scale, thereby affecting natural gas prices, revenues, and profits. Utilities that purchase gas when prices are lower during summer in order to keep inventories ready for the winter also have an effect on natural gas seasonality. However, fears over repeatedly bad hurricane season have led to higher prices because of their track record of causing supply disruptions. High prices during 2005 and 2008 slowed demand growth and led to increases in production, with the result that the U.S. became more self sufficient in natural gas. Imports of gas from Canada have plummeted in 2008 and will continue to decrease in 2009.
The supply-demand gap in the U.S. responds to high prices by both increasing supply and decreasing demand. If both supply and demand respond to rising prices overshoot, the market will face a glut and prices will decrease resulting in a cycle in prices from high to low. Since the U.S. natural gas market is now entering the downward price phase of the cycle, the question is how soon will the reverse happen as low prices diminish supply and increase demand and set the stage for higher prices. IHS Global Insight forecasts that the price recovery will be delayed to 2010/2011 because of the depth of the economic recession. Natural gas price deteriorated since start of 2009 and closed at $3.65 MMBTU, on July 31st. But strong start of first week of August surpassed $ 4 MMBTU, which unpromising and may continue to rise with hurricane season.
By Mostafa Mabrouk
Assistant Vice Chairman for Economic Affairs