Daily Management Review

Continuing Oversupply Concerns Keep Oil Trading Volatile


Continuing Oversupply Concerns Keep Oil Trading Volatile
Hit by continuing oversupply, the strong dollar and weak global demand, oil prices have been volatile again.
In order to discuss reducing output, some members of the Opec group of oil producers are calling for an emergency meeting.
An extraordinary meeting could be held in "early March", Opec president Emmanuel Ibe Kachikwu said.
Before recovering to trade 25 cents, or 0.8%, higher at $31.80 per barrel, Brent Crude fell as low as $30.44 per barrel on Tuesday. On the other hand West Texas Intermediate, the US benchmark contract was 9 cents, or 0.3%, higher at $31.50 per barrel.
With prices close to levels not seen since 2003, since the start of the year oil prices have already fallen by 20%.  
The deterioration in the oil price has prompted calls from several members of Opec for a fresh review of quotas even as the oil producing organization members are not due to meet until June, having previously met in December.
"We did say that if it (the price) hits the $35 per barrel, we will begin to look (at)... an extraordinary meeting," said Mr Kachikwu, who is also Nigerian minister of state for petroleum resources.
While not disclosing the names, he said that "a couple" of countries had been pushing for a meeting. Saudi Arabia, which has resisted calls to cut production would be critical for the meeting.
"Saudi Arabia has never held the position that it does not want to talk. In fact, it was very supportive of a meeting before June, at the time when we held the December meeting, if (there was a) consensus call for it," the Opec president said.
Even in a declining oil price environment, Saudi Arabia is keen to maintain market share.
Smaller oil producing nations, such as Nigeria, Algeria and Venezuela are hurt most by the lower oil price. The smaller oil producing nations are suffering heavily as the price of oil is no longer high enough to cover the cost of production.
Very recently even Saudi Arabia announced a budget deficit nearing $100bn (£68.4bn) for last year prompting tax hikes within the Kingdom as an impact of the lower oil prices.
In an effort to raise cash, Saudi Arabia also said it was considering listing state oil company Saudi Aramco on the stock market.
"The near-term outlook for the oil market is bleak. Opec is producing flat-out into a market that is oversupplied by over one million barrels per day; already decelerating demand growth could further decay with slowing economic activity; and OECD inventories that are already at record levels are likely to expand through at least the middle of the year," said market analysts Jefferies.
The oversupply of oil has resulted in many countries running out of storage. According to Paul Stevens, professor emeritus at the University of Dundee and a Middle East specialist, the US, which is thought to have among the largest oil storage facilities in the world, has nowhere left to store it.
"Storage is pretty much full and people are already talking about buying tankers as floating storage. But if supply continues to outstrip demand, then the only thing that you can do with the oil is sell it, which inevitably pushes the price down," he said.