Oil at less than US$70 per barrel?

The Alternative View

EVEN the oil majors have stopped forecasting the price for crude oil that has dropped by more than 25% since June this year because nobody could really put a finger on what the floor price will be come next year.

Research houses have generally predicted crude oil to settle at between US$75 and US$80 per barrel next year. But the figure keeps changing every week.

The West Texas Intermediate (WTI) closed at US$78 per barrel on Thursday while Brent crude is trading at US$82 per barrel. Some have predicted a respite for oil with the coming winter.

But will that really be the case? Will a cold winter help find a stable floor price for crude oil?

It may not be the case because the oil price decline has so far gone against all conventional logic. Previously, when there are conflicts in the Middle East that cause fears of oil supply disruptions, prices tend to shoot up. But that no longer seems to hold water these days.

The current unrest in the Middle East and Russia’s conflict with the rest of Europe and the United States have failed to lift oil prices.

Saudi Arabia used to dictate global oil prices, being the largest supplier of the commodity. But the United States has caught up, thanks to its large production of shale oil and gas. The United States is now a close second, behind Saudi Arabia, in terms of production of oil and gas, thanks to the shale oil and gas fields.

It has stopped for now the import of oil from Nigeria.

The traditional oil and gas producing countries are riding on the hope that the shale oil and gas phenomenon is only temporary, that the United States will not be able to sustain its production of oil and gas as the price declines and hence a floor price will be discovered sooner than people think.

This is based on the notion that the cost of producing shale oil and gas – through horizontal drilling and hydraulic fracturing – is more expensive than the cost of extracting conventional oil found in the Middle East and resource-rich Russia.

But latest reports indicate that the cost of producing shale oil and gas in the United States has dropped to an average of US$57 per barrel from US$70 per barrel in the middle of last year.

And the cost could likely go down further as more shale oil and gas activities pick up because the producers tend to enjoy economies of scale and become more familiar with the production process. This year alone some 18,000 horizontal wells are to be drilled, according to a report.

What this points to is whether the winter comes or not, nobody really can say with certainty that the price of oil will go up.

Another point that has come about is that the relatively low crude oil price regime may stay longer than most people think.

Although shale oil and gas is not proven to be a long-term source of hydrocarbon, it is something that will not go away in the next few years at least.

Considering the circumstances, Malaysia needs to re-think its subsidy rationalisation programme for petrol and diesel.

The Government is looking at ways on how to better administer the subsidy that is given to consumers. At the moment the subsidy is about 12 sen per litre, as of October this year. This is based on the price of RON95 at RM2.30 per litre.

In a reply in parliament last week, Deputy Finance Minister Datuk Ahmad Maslan said that if the global crude oil price was between US$75 and US$80 per barrel, there would no longer be any subsidy on petrol.

Effectively, the trigger for petrol at the pump without subsidy is when crude oil trades at between US$75 and US$80 per barrel. This is not far from where the global prices are today.

In the next few months, indications are that the US dollar is expected to rise gradually, indicating further pressure on commodities, including crude oil.

In fact, the US dollar is already appreciating against all major currencies. In the last one month, it has gone up by more than 2.6% against the ringgit.

The rise of the US dollar is helped by expectations of the interest rates there rising, due to the end of the quantitative easing programme last month.

Everything points to a period of lower oil prices. This helps reduce the cost of doing business and more importantly, allows the Government more time to look at how it wants to implement a programme for petrol and diesel subsidies.

There is really no hurry now to rush into any kind of such programme.