Asia key to global energy demand growth; oil remains a valuable commodity
April 28 2020 05:32 PM
Saad al Kuwari
Saad al Kuwari

By Saad al-Kuwari

• What exactly is happening in the oil market?

• How did the price of US oil become negative? What is the story of Brent oil?

• Will a drop in shale oil production pave the way for a rise in the price of conventional oil in the near future?

The global oil sector suffers from a combination of negative oil prices, excess storage space, declining demand, and calls for a renewable energy revolution in the post-Covid-19 era.

It seems that followers and analysts of the American and European oil markets pin their hopes on the recovery of oil demand from Asia.

Even international financial institutions, such as the International Monetary Fund, the World Bank, the European Central Bank and the Organisation for Economic Cooperation and Development (OECD) indicate that the future of economic growth and energy demand growth is linked closely and related to the future of China, India, and the entire Asia.

In the wake of these recent developments, there are questions in our mind. What is happening in the oil market? How did the price of US crude — WTI — become negative?

What is the relationship of Dated Brent crude to WTI crude and what is the impact on oil prices in our region?

What is the forecast of the oil price?

And why the major producers simply close the wells and wait for prices to rise?

These questions and others we will try to answer them briefly in this article.

How is the market down? Why did prices drop suddenly and what are futures contracts.

On the market, oil is traded either through spot contracts that require the immediate delivery of the contracted quantity, or through futures contracts, that give the speculators the right to buy or sell a certain amount of oil at a predetermined price provided that delivery takes place at a specific later date.

In the futures market, speculators are active, who have no need for oil, other than making a quick profit because they are not end-users or refineries.

Reverse positions, but in the end, after the due date, the oil is delivered to the holder of the future contract through procedures regulated by the stock exchange, subject to government regulation.

In the case of US crude, delivery takes place at the forward contract delivery centre in Kuching, Oklahoma. In light of the deteriorating conditions of the oil markets and the absence of voids in storage space, speculators have to sell this oil to reduce their losses, as was the case with the American crude, as the selling price reached less than zero (- $37.7/BBL) .

The oil market is currently in a state of ‘contango’, meaning that the price of futures contracts is higher than the spot prices. In other words, when it enters the market (in this case) the commodity in question is more valuable in the future than in the present time.

What distinguishes dated Brent from WTI crude? And why producers do not close the oil wells!

Most of the American production of crude is concentrated in land or landlocked places, which prevents it from benefiting from the advantages of floating storage. American crude production is concentrated in areas (offshore) separated by water of about 800km, while Brent crude has no problem in accessing floating oil tanks because it is priced on an island in the North Sea, and is therefore, less affected by storage concerns.

Oil in the Arabian Gulf region is priced based on Dubai-Oman crude oil. Oil extracted from Europe and Africa is priced based on the price of Brent crude.

Oil price fall to this level does not mean that oil has become worthless. On the contrary, oil will always be valuable, but the idea is that no one wants to get it "now" in light of the collapse of demand and the fullness of storage tanks.

This is illustrated by the price of oil scheduled for delivery in June, when its price has exceeded $20 for US oil and nearly $24 for Brent.

The logical question that may have jumped into the minds of some in light of the current price collapse is: Why do companies not temporarily shut down oil wells and keep their oil in the ground until the prices rebound to reasonable levels?

Simply put, this is practically not possible, because it puts the wells at risk of damage, which means wasting the remaining reserves inside the well as well as the costs of developing it.

Therefore, producers prefer to continue operating the well, even at a loss, until the price of oil rises again and a barrel of oil becomes higher than its production costs.

Finally, if there is one bright side, it is difficult to determine what will happen next to the oil markets.

But I think when the oil is ready for a big return, there is likely to be a shortage of energy (which is in surplus now) accompanied by a decrease in the supply and demand for high fuel, as a result of the closure of most shale oil wells and some oil wells.

Therefore, the price of a barrel of oil could reach $50 or higher before the end of the year.

There will be a need for new flexibility based on a diversified economic system to confront and mitigate future international crises or epidemics.

It is evident that the use of energy will increase dramatically during the next 30 years in the world and the proportion of that energy that oil and gas will provide will be higher than it is now.

* Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.

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