Oil prices fall

The price of crude has fallen more than $35/bbl this year and could go even lower in the current environment of severe risk aversion and macroeconomic pessimism, said analysts with Barclays Commodities Research. “Whether oil fundamentals alone warrant such a sharp move remains debatable, but clearly sovereign debt concerns surrounding southern European countries have taken a material turn for the worse and have been dominating sentiment,” they said.

“Like most assets exposed to global growth, oil could very well trade in a broad range in the next few years, with…the upside capped by a weaker growth and investment environment, barring the flaring up of geopolitical events,” said Barclays analysts.

Yet they said, “Contrary to popular belief, actual oil demand in the first 5 months of this year has actually held up just fine, despite the fairly sharp slowdown in Chinese demand growth. However, there is no doubt that June has seen a severe deterioration in demand, with cargoes around the world finding no bid.” Physical differentials have weakened, and Brent has gone into contango. “It also seems to us that some of the latest trends of demand weakness have been exaggerated by destocking and a complete freezing of purchases owing to a sudden rise of uncertainty about the global macro outlook combined with a sharp depreciation of emerging market currencies, most of which are large importers of oil,” they said.

Rebound of oil prices requires increased demand by China and India, plus stabilization of demand among members of the Organization for Economic Cooperation and Development, “which has recovered robustly from the first quarter,” the Barclays analysts said. “The sudden bout of severe uncertainty together with some stockpiling may well delay the rebound in oil demand to the end of the third quarter or fourth quarter, but our base case still remains for a recovery, albeit delayed, and not a falling away from current levels as seen in 2008-09.”

If demand improves, little additional effort will be required on the supply side. The call for crude from the Organization of Petroleum Exporting Countries in the last half of this year is broadly the group’s current output, “with the uncertainty around Iranian supplies risking pushing actual OPEC output lower than the call,” Barclays analysts said. “Commercial inventory builds do not appear to be excessive, in our view, and in some cases the need for restocking could create additional support for demand. In this case, beyond any momentum driven sell-off, prices should bottom around current levels through in the third quarter before picking up in the fourth quarter.” But further economic discontinuity could keep crude prices “arguably closer” to $80 or less before OPEC eventually shores up prices to their desired level of $100/bbl, they said.

Sweet crude supply

Meanwhile, the conventional sweet crude market has been disrupted by the US shale oil boom, said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

“The perceived wisdom is that the world is very tight on sweet crude since the distillate crunch in 2008 (when global refineries struggled to produce enough low-sulfur distillate fuel from sour crude). Back then it was also widely projected that incremental crude oil supply would be mainly high sulfur,” he said. Consequently, investments in the refining sector over the past few years have been geared towards processing sour crude.

However, Zhang said, “The whole hypothesis has been thrown off course by the rapid growth of US shale oil production, which has similar characteristics to that of conventional sweet crude oil. According to the US government, domestic US oil production hit the highest quarterly level in 14 years in the first 3 months of 2012.”

Much of the incremental production previously was trapped in the Midwest, but new infrastructure is allowing more shale oil to be moved to the US Gulf Coast, where about half of the US refining capacity is located and has traditionally relied heavily on foreign crude imports.

“Consequently, the US imported less crude oil, particularly sweet crude, which in turn weakened the premium typically commanded by sweet crude,” said Zhang. As a result, he said, “The Bonny light crude price differential has softened materially.” That situation is likely to persist, “which means that some of the refining investments aimed specifically at sour crude won’t realize the return they had promised. Fortunately, it is typically easier for refineries to replace sour crude feed with sweet crude than the vice-versa,” he said.

(Online June 25, 2012; author's e-mail: samf@ogjonline.com)

Related Articles

Antitrust gambit shows why biofuel mandates must end

08/26/2013 With a ludicrous antitrust initiative, US senators from Iowa and Minnesota show why the federal Renewable Fuels Standard (RFS) needs repeal instead...

Energy consumption to escalate

07/30/2013 World energy consumption will jump 56% in the next 30 years, driven by growing demand in developing countries, the US Energy Information Administra...

US, Mexico energy trade in flux

05/28/2013 Energy trade between the US and Mexico is in flux with rising crude production in the US, falling production in Mexico, and rising Mexican demand f...

Foreign crude supply concentrated

04/29/2013 It’s no secret the jump in US oil production in recent years has dropped imports of foreign crude to the lowest It’s levels since 1997—down 1.3 mil...

Corn, ethanol prices squeeze profit

03/25/2013 Last summer, US prices for ethanol and corn reached such an imbalance that production costs exceeded revenue at relatively simple ethanol plants, t...

Working on the railroads

02/26/2013 The rapid increase of North American crude production has resulted in pipeline bottlenecks in some areas, forcing more reliance on rail transportat...

War, weather issues affect energy

01/28/2013 The fatal 4-day siege at the In Amenas gas production plant in eastern Algeria near the Libyan border that left 81 people dead “heightens concerns ...

Historic mistakes should guide US on LNG exports


Political opposition to LNG exports by the US brings to mind monumental energy mistakes of the past.

2013 looks a lot like 2012

12/31/2012 New Year 2013 looks as though it will be much like the old one. There’s rioting in Egypt, confrontation with Iran, continued crisis in the Euro-zon...
White Papers

UAS Integration for Infrastructure: More than Just Flying

Oil and gas companies recognize the benefits that the use of drones or unmanned aerial systems (UAS) c...

Solutions to Financial Distress Resulting from a Weak Oil and Gas Price Environment

The oil and gas industry is in the midst of a prolonged worldwide downturn in commodity prices. While ...
Sponsored by

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by
Available Webcasts

Operating a Sustainable Oil & Gas Supply Chain in North America

When Tue, Oct 20, 2015

Short lead times and unpredictable conditions in the Oil & Gas industry can create costly challenges in supply chains. By implementing a LEAN culture of continuous improvement you can eliminate waste, increase productivity and gain end-to-end visibility leading to a sustainable and well-oiled supply chain.

Please join us for this webcast sponsored by Ryder System, Inc.


On Demand

Leveraging technology to improve safety & reliability

Tue, Sep 22, 2015

Attend this informative webinar to learn more about how to leverage technology to meet the new OSHA standards and protect your employees from the hazards of arc flash explosions.


The Resilient Oilfield in the Internet of Things World

Tue, Sep 22, 2015

As we hear about the hype surrounding the Internet of Things, the oil and gas industry is questioning what is different than what is already being done. What is new?  Using sensors and connecting devices is nothing new to our mode of business and in many ways the industry exemplifies many principles of an industrial internet of things. How does the Internet of Things impact the oil and gas industry?

Prolific instrumentation and automation digitized the industry and has changed the approach to business models calling for a systems led approach.  Resilient Systems have the ability to adapt to changing circumstances while maintaining their central purpose.  A resilient system, such as Maximo, allows an asset intensive organization to leverage connected devices by merging real-time asset information with other critical asset information and using that information to create a more agile organization.  

Join this webcast, sponsored by IBM, to learn how about Internet of Things capabilities and resilient systems are impacting the landscape of the oil and gas industry.


Taking the Headache out of Fuel License and Exemption Certificates: How to Ensure Compliance

Tue, Aug 25, 2015

This webinar, brought to you by Avalara, will detail the challenges of tax document management, as well as recommend solutions for fuel suppliers. You will learn:

-    Why it’s critical to track business partner licenses and exemption documents
-    The four key business challenges of ensuring tax compliance through document management
-    Best practice business processes to minimize exposure to tax errors


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!


Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected