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Alexander Khurshudov: troublesome year finishes on a positive note

Alexander Khurshudov, expert Oil and Gas Information Agency
December 30, 2019/ 13:59

This year was a little hectic, though not too bad for the oil industry. Another slumping in oil prices had been expected in January, but then the prices bounced back from $50 for a barrel of Brent. At the same time dire forecasts of a global financial crisis proved wrong, we came out unscathed. Let me now list the other significant events and facts.

1. Oil production in Russia is expected to reach 560 mln tons, with 0.75% increase over the last year’s figures. They seem to have been reducing production for the whole year, but have eventually added to it.

2. The Saudi Arabia has really reduced production by 4.85% (0.5 mln bpd), and the OPEC in general has decreased production by 6.2% (almost 2 mln bpd). We could have praised them for exceeding the planned reduction if only we didn’t know that they hadn’t put too much effort in it. Iran lost a third of its production (1.2 mln bpd), Venezuela 41.6% (0.56 mln bpd), while only the UAE and Kuwait have managed to increase it this year.

Is it now clear why the OPEC cut their production limit by another 500 thousand bpd so eagerly? The reason is that the exporters cannot sustain higher production rates.   

3. The North American countries have been increasing oil production, though at a slower rate. The US added 1 mln bpd to production against 1.7 times higher forecasted values. Canada added 2.4%, Brazil 4.9%.

4. Rig count drilling for oil in the US shale fields has declined by 200. Only last week, when the WTI price exceeded $60, active rig count increase by 14. Oil import decreased by 0.5 mln bpd with export increasing by about the same value. Commercial oil stocks have hardly changed over the year. Next year oil production will continue growing at a still lower rate.

5. Saudi Aramco shares sold like hot cakes. At the December auction 1.5 % of its shares were sold for $25.6 bln. The buyers were encouraged by the company’s huge earning: last year it amounted to $212.8 bln (before taxes), shareholders’ net income was $111 bln. The incredible profit margin (59.8%) is due to a very high natural resources royalty and availability of conventional reserves.

However, Aramco’s oil reserves have proved to be significantly less than declared. In its latest Statistical Review of World Energy BP estimated them at 297.7 bln barrels, while the prospectus states 226.8 bln barrels, which is 24% less. Besides, it includes all hydrocarbon fluids, including liquefied gases. The buyers haven’t had much time to absorb the auditors’ conclusion, so I think this decrease is not the last one. I won’t be surprised if the Kingdom of Saudi Arabia starts to decrease oil production over the coming years.

6. This year’s gas production in the RF is preliminarily estimated at 737 bln m3, including export of 247 bln m3. The average price of pipeline gas over the first six months of the year amounted to $209.6 for 1000 m3. Export has grown by 42% over 5 years, while the revenue from it decreased by 19%. LNG export is getting more profitable, so it is growing and is expected to amount to almost 50 bln m3 this year.

7. We have been given an illusion of agreement on gas transit with the Ukraine as a New Year present. Why illusion? Do you know many occasions when a new government in the Ukraine kept the previous government’s promises? I don’t know any. How can the EU guarantee these obligations? They cannot. They already “guaranteed” things to Yanukovych. The only way to reason an extorter is to take them by the throat. Meanwhile we are playing to lose with cheaters (again and again!) and then we’ll be whining in their corrupted courts about them mistreating us…      

I’ve saved my estimate of oil price dynamics for desert at the festive table. It is going to be optimistic. 

Last year the global oil consumption grew by 1.2%. actually claims that oil production increased even more, as much as by 1.9%. Though this is due to manipulating numbers, for the global oil reserves have stayed the same. Under the circumstances the key factor is the OPEC’s activity (see the picture).

The OPEC took a decision to reduce production three times and to add production only once. Every time their decision let to a desired result. Since it is getting harder and harder to sustain an increase in production the chances that they will cut production limits are rising.

That is why I am expecting an increase in the oil price. The increase won’t be triumphal, it will have its ups and downs, but by the end of the year the Brent is likely to cost around $70-80.

Happy New Year, my friends!

Let’s welcome it with our glasses full of Champaign and our harts full of optimism!

May the optimism never leave us, may oil and gas never deplete!

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