Meanwhile, the OPEC Basket Price, which rose from $43 to $48.5 around the Algeria Meeting, has in recent days fallen back below $42, as the negotiations have been taking place and press releases issued by OPEC have not given any real support to a tangible deal materialising. It all seems very unlikely, and one can easily say it won’t happen. However, OPEC has the ability to surprise, as it did in December 2014, and what could happen is that an announcement is made that a cut will take place. This will have a short term impact on the market and push the price up, but if it can be seen that overall output is reduced, the effect will be longer lasting. For this to happen, Saudi supported perhaps by the GCC Members, Kuwait, UAE and Qatar, who collectively account for 50% of OPEC output, could take it upon themselves to reduce by 1mbpd.
There has to be some kind of a deal put forward now, for OPEC to retain any credibility and if it could trust on Russian support in the short term, the oil price would rise over the $50 level towards $60, and give some respite to producers until supply and demand come closer to balance mid-2017. Conversely, if Saudi is unable to gain support from enough OPEC Members, it could simply open the taps and flood the market once again, hurting more those that fail to support the initiative than itself.
Of course, the medium term dilemma for OPEC is that shale producers will return to the market as prices rise and OPEC will face similar problems again as supply overtakes demand. Perhaps then OPEC may reconsider its strategy but, for now, thinking seems to be short term. Looking ahead to 2017, oil prices will probably average out at around $55 and at times may reach $60 but longer term, I am not expecting to see prices soar above these levels. In fact, if OPEC is not able to set up and maintain a tangible deal, we can expect to see a return to the sub $50 level and below.
In the background, many European Gas contracts were historically linked to the price of oil, but as cheaper gas suppliers came to the market, at a time when oil prices were high, competition followed, and many such arrangements moved away from the direct link to oil but not all. The world is awash with gas, and whereas different prices used to be reported around the world, we now seem to be closer to one overall price, apart for distribution, thanks to the rise in LNG capacity. Supply is increasing at a much faster rate than demand and the gap in 2015 between the two rose from 93bcm to 111bcm pa with the greater proportion flowing to Asia than anywhere else. Then, as a final bonus to energy consumers as gas is used primarily for generation in many EU countries, the price of electricity should remain lower as a consequence, provided that generation plant can be maintained during the winter period and that extreme weather conditions do not arise.
So, looking ahead, for as long as oil prices remain in the $50 to $55 range we can expect to see little increase in either the commodity price of gas or electricity. However, the strength of the US dollar influences the revenue that producers receive for their oil and should Donald Trump be elected as President of the US, one should expect to see the value of the dollar fall, to the detriment of producing nations. Furthermore, the Climate Change Agreement COP21, which has since become law, will be placed in jeopardy as Trump has threatened to “tear up” the US commitment while Clinton had promised to expand on it.
Written By – John Hall
