Price Corridor: Who is trying to knock down the price of oil?

By Elena Zhuk, May 19, 2014

The attempts to use intervention measures to artificially knock down global oil prices is likely to be counterproductive and may eventually lead to shrinking investments into the industry, Gazprom Neft general director Alexander Dyukov said at the April 4 meeting with press reporters in St. Petersburg.

For instance, U.S. oil output growth has been chiefly fueled by development of unconventional reserves with rather high production costs. “Estimated cost of shale oil production ranges from $65 to 85 per barrel. If we talk about deepwater offshore production, lifting cost approaches $100 per barrel, and production from Canadian oil sands comes at $110 per barrel. That is why slashing the global oil price below $90 per barrel would greatly impact the efficiency of these projects,” said Dyukov.

According to him, lower prices would force oil companies investing in unconventional resources production to reduce investments, which consequently may shorten supply of crude to the global market and lead to an oil price rebound.

The OPEC countries are able to influence oil prices, adds Dyukov. In particular, the three Middle Eastern members of the oil exporters’ organization, Saudi Arabia, Kuwait and the United Arab Emirates, have surplus production capability to produce an additional 3 million barrels per day. On the backdrop of OPEC’s 2014 global oil consumption forecast of  91.14 million barrels per day, this is but a slight increase. On the other hand, though most of oil is sold under long-term contracts, this extra output may influence the price to a certain extent as it represents about 20 percent of today’s spot offers, which shape the price quotations (according to Dyukov, currently some 15 million barrels of oil are traded daily on the spot market).

Still, in his opinion, it’s unlikely that the mentioned OPEC members are interested in lower oil prices. “All these countries have designed and are implementing major social and investment programs aimed at economic development. The opportunity to sell additional volumes of crude doesn’t necessarily translate into higher revenue for producers. On the contrary, the chances are that the revenue would fall, which may hurting the budget receipts of these countries,” Dyukov explains. For example, the Saudi government’s budget is linked to an oil price of $90 per barrel and lower prices will hardly benefit local economy.

According to Dyukov, OPEC members might consider a temporary price reduction, but only in order to reclaim some of the ground currently held by non-conventional crude producers. In the long term, OPEC doesn’t pursue the price range of $80-90 per barrel, preferring the $100-110 band instead.

“Adjusted for a certain premium and the growing demand, which has to be met, the price range should be $95-100-115 per barrel, taking into account political instability, which is sure to linger in this or that way,” said Dyukov. “Any tilt beyond this price range would disrupt the equilibrium and result in shrinking investment in oil production,” the executive added.

Gazprom Neft general director doesn’t rule out a possible drop in prices and the market being