Friday 29 Mar 2024
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KUALA LUMPUR (March 10): Despite market indicators aplenty, it has become near impossible to make an accurate prediction of where oil prices are heading.

Writing in the Oilprice.com portal, Washington-based energy and environmental issues columnist Nick Cunningham said predictions for oil prices for 2015 had been all over the map since the price crash accelerated in November last year.

Hence, the widely divergent Citigroup’s forecast of US$20 per barrel versus energy tycoon Thomas Boone Pickens’ prediction of a return to US$100 per barrel, he said.

“OPEC’s Secretary-General even said prices could shoot up to US$200 in the coming years as a result of overly drastic cutbacks and a failure to invest in new production.

“With those estimates at the extremes, most analysts think prices will continue to see-saw within a rough band of US$40 to US$70 for the rest of the year. Still that is quite a large range, highlighting the fact that everyone is merely guessing,” said Cunningham.

He pointed out that the weekly measurement of the number of rigs still in operation had become one of the most watched indicators as well.

While the rig count metric had garnered a lot of attention as a leading indicator of potential cutback in oil production, it had also been criticised for not being an entirely accurate portrayal of output.

"Drillers have become more efficient, able to use fewer rigs for the same amount of production. So, the notion that a falling rig count will necessarily lead to a fall in production may be a bit more complicated than it seems,” he said.

Cunningham also pointed to a new metric that had popped up in recent weeks, which was the level of available storage.

“Excess oil has been stashed in storage tanks around the world, but government data suggests that storage space is starting to run low,” he said.

Growing shortage of places to put oil has led to the creation of an oil-storage futures contract by CME Group.

“As storage begins to run out, the glut could worsen, sending prices way down,” he said.

Cunningham said another likely key indicator was the number of drilled but uncompleted wells in existence, estimated at some 3,000 wells. The wells were left uncompleted as producers wait for prices to rebound.

“Instead of storing oil in tanks, simply holding off on finishing a well can allow drillers to 'store' oil in the ground. Once completed, however, the backlog of wells will push down prices,” he said.

Still, the most important indicator of where prices are heading remains the actual level of oil production.

“In the face of spending cutbacks, drops in rig counts, and ongoing price pressure, oil production continues to defy gravity.

“Output continues to climb,” he said, adding that at the end of February, the U.S. was producing 9.3 million barrels per day, up 10% since prices began crashing in June 2014, and up 2% since the beginning of 2015.

While low prices had yet to cut into the trend line, it would have to at some point soon, he said.

Another big unknown is how demand would respond to low oil prices.

Although lower prices should push up consumption, how quickly and how fervently consumers respond would go a long way to determining when the glut would subside, he said.

“Overall demand is also largely determined by broader economic growth. With so much unknown about the rate of economic expansion around the world, demand projections are understandably all over the place,” he said.

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