Monday , December 18 2017

Crude oil price below $40 is not sustainable – Pure Speculation

Kamal Al Harami
Kamal Al Harami

It is not possible nor practical for oil prices to fall below $40 a barrel. Everybody is predicting that oil prices will decline to as low as $30 or even $25, but this is pure speculation just to gain more publicity or to be known as the one who forecasted low level of crude oil prices.

The hard fact is that no oil producer outside the OPEC can survive such a low level, and within a short period, it will be forced to close down. The only countries that can manage such low oil prices are the Arabian Gulf producers, as the rest have higher cost – almost double, above $20 a barrel – including North African countries, Nigeria, Angola and Venezuela.

So let us slow down before making predictions that the prices of oil will be low in the future, as it will serve OPEC countries in general, whereas the other oil producers have more expensive conventional oil.

The cost of producing one barrel of oil in Saudi Arabia is $4 to $6 a barrel, close to $5 in Kuwait, $7 in Iraq and the Emirates, $15 in Qatar and Iran, $25 in Algeria, $30 in Nigeria and $40Angola. The cost in Russia is close to $25 for conventional oil and more than $100 for its Artic production, while it is close to $35 a barrel in the North Sea.

The low cost of production in the Gulf is due also to its high production per barrel which exceeds one million barrels per day in comparison with the other oil fields and this is an added value for the region.

At such level of oil price, other producers, mainly the international oil companies, cannot operate. They will incur heavy losses and will be forced to cut down further on their manpower, along with lower returns for their shareholders.

We know that OPEC’s share of supply to meet the demand for oil is close to 30 percent with lower cost oil fields. Other producers provide the rest of the supply, which makes it impossible to produce oil at a price below $40. It’s a simple fact that must be faced.

As a result of low oil prices in oil producing countries and the international companies having no option but to shut down their expensive oil fields, the flow of oil into the international markets will slow down and lead to taking out some surplus crude oil – around three million barrels. This will result in balanced inventory while it will take some time to bring production back to where it was before, as it will push the oil price to come up again.

Low oil prices will lower oil production among the non-OPEC producers, further strengthen oil prices, and make OPEC gain additional market share. In the end, it will be beneficial for OPEC countries if they cut down their expenses and streamline their subsidies.

It’s another one-time opportunity to take advantage of oil prices and to make it positive overall.

Email: naftikuwaiti@yahoo.com

By Kamel Al-Harami

Independent Oil Analyst

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