Why oil economies will remain pressured, by IMF

Despite the relative stability in the international price of crude oil in recent times, oil exporting countries’ revenue will not break even soon, as the commodity’s prices will continue to face headwinds.

Besides, the turmoil in financial markets, secular drop in petroleum consumption in advanced countries, plus a strong dollar, have put downward pressure on oil prices and the persistence only points to a “lower for longer” scenario for oil prices.

At the weekend, the International Monetary Fund (IMF) Global Economy Forum, noted that the price of the commodity will not return to the high levels that preceded their historic collapse two years ago.

While reduced investment in the sector has been projected this year, even resulting to lower production by non-member countries of the oil cartel, production will still exceed consumption.

The report said many experts have also projected that oil markets will balance in 2017, albeit with high level of inventory, a development that will not improve the earnings of the oil economies.

According to it, shale oil production has permanently added to supply at lower prices, while demand will be curtailed by slower growth in emerging markets and global efforts to cut down on carbon emissions.

The report said: “it all adds up to a ‘new normal’ for oil.”

“Shale has been a game changer. Unexpectedly strong shale-oil production of five million barrels per day contributed to the global supply glut. That, along with the surprising decision by the Organization of the Petroleum Exporting Countries (OPEC) to keep production unchanged, contributed to the oil price collapse that started in June 2014.

“Although the price collapse led to a massive cut in oil investments, production was slow to respond, keeping supply in excess. Shale drillers have significantly cut costs by improving efficiency, allowing major players to avoid bankruptcy,” the reported noted.

It also pointed out that there is uncertainty regarding supply, especially regarding the cost associated with extraction, as well as production from so-called shale “fracklog”- drilled but uncompleted wells.

Indeed, while the anticipation of an OPEC production cut in cooperation with other exporters has boosted prices to the current level, the success of Shale and the challenging global growth, particularly that of the emerging markets are threatening oil price rise.

The uncompleted wells, the report noted, can add to production flows in a matter of weeks and hence considerably change the dynamics of production compared to conventional oil—that features long lead times between investment and production.

While OPEC members have recently agreed to cut production, that agreement is yet to be finalized and emerging data, according to IMF, suggest that shale-oil production may be once again more resilient than expected.

IMF said that falling prices spurred demand to a record high of 1.8 million barrels per day in 2015, but now expected to slow to the trend level of 1.2 million barrels per day in 2016 and 2017.

The global institution said that a sizable share of oil demand is attributable to the price drop rather than income gains, hence with limited scope for further declines in prices in dollar terms, increases in oil demand will depend largely on prospects for global economic growth.

“The outlook for demand growth isn’t encouraging. In the past couple of years, oil demand has been driven by China and other emerging-market and developing countries.

“While China accounts for just 15 percent of world oil consumption, its contribution to oil demand growth is significant because its economy is growing much faster than those of advanced nations. Further slowdowns in emerging and advanced economies can change the demand picture significantly,” the report added.