Oil prices fall as demand downturn

The dramatic situation of oil prices is apparently dire. It deems that Top officials of two camps disperse rumors, which affect oil prices between downturn as imaginative cuts and prospective economy recovery. Actually, as common practice, prices are oscillating but incline to down. Using gas as clean energy is increasingly accepted, particularly in Europe and U.S.A, and their gas outlook can possibly leads to oil price falls

Brotherhood of past
After Russia and Ukraine signed a 10-year gas deal clearing the way for the resumption of supplies to freezing Europe, where 20 countries will benefit from supply, top Ukrainian officials criticized as “DAFT”, claiming the price set for Russian gas was too high and offsetting transit rates for Ukraine were too low. The dispute had reflected political tension between Moscow and KEIV on a range of issues. Russia strongly opposes a bid by its former Soviet neighbor to join the NATO military alliance. Even when, gas flows returned to normal, the effects will linger. Russia reliability as an energy source, as well as, Ukraine’s transit credentials are under renewed scrutiny and Europe is anxious to diversify supply so it cannot become hostage to local disputes.
This bilateral dispute harmed the confidence placed in the two countries. Under the new contract, Ukraine would pay $360 per 1000 cubic meters of gas in the 1st quarter of this year, which is double KEIV was paying in 2008 ($179,50). The price is likely to decline later this year as gas tracks falling oil prices, but it could be a huge burden on Ukrainian economy struggling with debt and sharp falls in the local currency. Russia’s Gazprom provides quarter of gas supply to Europe, and now signed a Memorandum of Understanding (MoU) with Nigerian National Petroleum Corp establishing 50/50 joint venture. The deal covered petroleum and gas exploration with approximate cost of $2,5 billion. Nigeria has the world seventh largest proven gas reserve, but unable to develop its gas industry due to a lack of funds. Experts in Europe believe that by that deal, Russia attempts to increase control on Europe’s natural gas supply.

OPEC successive decisions
OPEC has cut production three times since September 2008 as an attempt to stem falling prices. It might consider reducing output again during its meeting in March, adding to agreed cuts of 4,2 million barrel per day (bpd). Crude also got a boost from remarks by OPEC Secretary General Abdullah Al-Badri at the World Economic Forum in DAVOS, Switzerland that an oil price of $ 50 a barrel is too low to encourage new investments and the cartel would enforce supply curbs. Still some in the oil market think there is a little room for prices to fall much further. The dismal forecast comes atop the IMF’s forecast that world economic growth this year will fall to its slowest since World War Two.
Saudi Arabia, the world’s largest oil exporter, is expected to cut the number of oilrigs by 20 percent this year. In 2008, Saudi Aramco had 130 onshore and offshore rigs in operation. Aramco officials said, “When a rig contract expires, we do not renew it as there is no need for drilling. The daily rental rates are high and there are two options, either to cancel or to renegotiate the contract to secure a better daily rate.”

Snapshots of petroleum companies
The major oil production companies have their own views about current situation. For instance, Schlumberger Ltd warned of spending cuts by customers in 2009, energy analysts have forecast spending by oil and gas producers would drop by one fifth or more in 2009 as companies move to conserve cash and Schlumberger Ltd echoed that sentiment. ExxonMobil declared that its 4th quarter net income fell by 33 percent as average crude oil prices fell to about $59 per barrel from about $90 per barrel. It is expected that 2009 activity to weaken with most significant decline occurring in North America gas drilling, Russia oil production enhancement and in mature offshore basins. Developing most new oil and gas fields is uneconomic at current prices, and would take time for inflation, which has driven exploration, and production costs to abate. Latin America would be flat in 2009, while Algeria and big players in West Africa offshore would hold up, only partially offsetting weakness.

OPEC confront problems
Oil producers found themselves committed with contracts services with valid prices while oil prices are falling, therefore projects costs became overburden and decision was to suspend most of them. OPEC see that price correction is not only the responsibility of OPEC but they ask other producers outside the organization, especially Russia to follow them and cut output to absorb excess quantities from oil market. Actually, Russia is considered a big exporter, if it can reduce production then it will help prices remarkably to improve, but till this moment, Russia does not respond because it has ambitious plans to increase cash inflows to face shortcoming in budget. Oil market traders mentioned that the market remains troubled by signs of global demand weakness and oversupply of crude oil. Recession hit both Japan and China makes the problem increasing sharply, their Q4 shows economic slump and shrank in exports in December 2008, especially in Japan by 35 percent. Many economists believe that China will expand by no more than 5-6 percent this year, which would be the weakest performance since 1990.

Hopes and ambitions
Now OPEC officials are periodically assessing and evaluating adherence and commitment of OPEC members with resolutions of production cuts before every coming meeting. International Oil Fund estimates oil-producing countries in the Middle East and North Africa approximately $300 billion within this fiscal year as a result of oil price retreat that counted for 50 percent of last year profits. Saudi Arabia leads cartel to stabilize price at 70$ per barrel, this depends on world demand in connection with economic crisis.
The U.S. Energy Secretary used to exercise pressure to lobby oil-rich foreign governments to open their spigots in the interest of keeping energy prices low, the last took place in spring of 2000, when the Secretary at that time persuaded the Middle Eastern governments to boost production, but will the present Secretary continue to encourage OPEC countries to avoid price spike? Apparently, the policy makers may concentrate on renewable energy through investments in efficiency to “country energy independent”, though the new administration intends to fulfill a pledge to double within three years the amount wind, solar and geothermal generating capacity in the U.S.

What OPEC don’t see
The main attributes of the Q1, 2009, are the turn down of commodities prices and layoff of workforce in three main sectors; oil production and services, banks and auto makers. Definitely, financial reforms will cause stability of prices then going trend up. U.S. Treasury Secretary Timothy Geithner made it gloomy when he said that current financial system cannot get recovery and any financial reform requires cost, risk and time. This sensitive address deal with with the theory of not only to inject cash but also to unfreeze credit. New thoughts will adopt new monetary policy and financial legislations.

Crude oil future
Investors showed optimism as governments have taken drastic steps in recent weeks to prop up the financial sector. The U.S. President Barack Obama’s administration has repeatedly said it is not aiming to nationalize banks, but government has to take bigger role in regulating financial institutions. Ailing banks are of particular concern, as they are less likely to lend to businesses, which in turn will consume less energy. The faltering economy has resulted in massive buildup of oil inventories, which is making it difficult for prices to hold above $40/barrel. U.S. Oil inventories have remarkably risen ranging between 300,000 and 1 million barrel/week through the Q1, 2009.

View from Davos
Business leaders participated in the World Economic Forum at DAVOS were disappointed. They did not find answer to their inquiries so, they stunned by their loss of public trust. Prescriptions offered at a session on restoring trust in business ranged from giving audit and compensation committees more teeth to simply demonstrating competence at companies core businesses. Most executives agreed that more regulation seemed inevitable. But some delegates called for new regulations to be limited and designed to give business incentives to invest, other focused on the consumer and on sustainable behavior. Industry delegates the forum agreed that more collaboration is necessary as industry trends in the downturn. Delegates are fully convinced that U.S. caused this crisis and should no longer lecture them on the economic policy.

By Mostafa Mabrouk
Economic Consultant, Ganoub El-Wadi Holding Petroleum Co.


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