News analysis

Oil market will find balance amid the turmoil

LONDON • There is a lot of disruption going on in oil. We're talking wildfires and war.

The US Energy Information Administration (EIA) calculates that unplanned supply outages, such as those in Canada and Nigeria, reached just over 3.6 million barrels a day last month, the highest since the EIA started tracking them in 2011. No wonder oil is back above US$50 a barrel. Or, from another perspective, how the hell is oil only at US$50?

Oil looks pretty subdued relative to earlier periods of strife, a recent report said. But then, you'd probably be a bit subdued too if you had a few hundred million barrels of oil dumped on top of you.

Mr Spencer Dale, BP's chief economist, talked about bringing oil supply and demand back into balance: The adjustment to lower prices has continued this year, with indicators pointing to solid demand growth and a decline in non-Opec supply. Based on current trends, it seems likely that the market will move broadly into balance in the second half of this year. But that simply means the problem in terms of accumulating oil stocks stops getting worse.

In the past, Opec would take the strain by cutting supply. But with the cartel about as useful as a chocolate teapot these days, oil producers have to rely on a Hunger Games scenario of rivals falling by the wayside, writes Liam Denning for Bloomberg's Gadfly column.

Unforeseen disruptions are, understandably, hard to predict. The EIA assumes that supply outages rooted in political strife, such as Nigeria's, tend to be persistent, unlike those due to natural disasters, such as Canada's fires. The EIA expects supply and demand won't balance until the second half of 2017.

Assume this projection already factors in three million barrels a day of disruptions. What happens if the world turns out to be a bit less or a bit more unpredictable? On the optimistic side, say Libya and Iraq enjoy a bit more peace later this year, with disruptions down to just 2.5 million barrels a day, dropping further to two million in 2017 as Nigeria's crisis eases. On the pessimistic side, say Canada's supply doesn't recover fully until next year, Libya's outages blow back out to 2011 levels and Iraq loses another couple of 100,000 barrels a day. Above all, a Venezuelan collapse wipes off one million barrels a day, and suddenly you've got about four million barrels a day off the market, Mr Denning writes.

A crisis-induced spike would tend to encourage unaffected producers to work harder, and vice versa. Three broad conclusions can be drawn, though.

First, clearing the glut will take time. The pessimistic scenario above implies about 200 million barrels of oil flowing out of inventories through the end of next year . This leads into the second point: That glut will keep oil yo-yoing up and down, but is essentially capped, until the tanks start draining consistently.The third point concerns Opec. Unable to coordinate supply cuts to support prices, Opec is instead doing it haphazardly. It accounts for about 40 per cent of global oil production, but about 80 per cent of unplanned disruptions so far this year. Low prices themselves feed destabilisation in the cartel's largely undiversified economies.

More stable members will reap higher prices for their own barrels. But that also underscores Opec's widening divisions as the oil market turns into a free- for-all. What's more, those higher prices help anyone with the wherewithal to exploit them - including one truly disruptive constituency: shale producers.

A version of this article appeared in the print edition of The Straits Times on June 13, 2016, with the headline 'Oil market will find balance amid the turmoil'. Print Edition | Subscribe