One of the most prominent voices in the crude oil market, the CEO of the Vitol Group, Ian Taylor, believes that we are in for a period of sustained weakness when it comes to crude oil prices. There are several reasons why this perception is being bandied about by people like Taylor and others in the oil market. For starters, we are simply seeing way too much crude oil being produced and not enough crude oil being consumed.
A secondary problem, not unrelated to the first, is the massive buildup of crude oil inventories. Since OPEC and non-OPEC producers are scrambling to supply as much crude oil as possible for fear of losing market share, inventories are rapidly building all over the world. In and of itself, inventories present many challenges for the commodity, notably a glut of oil that cannot be sold. With excessively high levels of oil supply continually being increased, there appears to be no respite for the problem of oil price weakness.
Rising oil prices invariably lead to falling oil prices
The only way that we can address the burgeoning issue of multiyear low oil prices is by reducing supply, increasing demand and strengthening the emerging market economies that provide the world with many of the commodities that we consume.
This oversimplification of the oil price dilemma is not without its problems. If OPEC and non-OPEC members decide to come to a consensus about reducing production, we will invariably see inventory levels start to decline, followed by a rise in prices (provided that demand is maintained or increases accordingly). However the catch comes with rising oil prices. As prices start to rise, shale oil producers across the U.S. and OPEC oil producers around the world will have plenty of incentive to re-enter the market. It is for this reason, and several others about to be addressed, that we are staring at cheap oil for the next 10 years or more.
Political interference plays a big part in oil price dilemma
Consider for example that countries like the U.S. and Canada, France, Germany, Italy, Spain and the United Kingdom are looking for ways to reduce carbon emissions, increase fuel consumption efficiency and source alternatives to fossil fuels. Viewed in perspective, this means that the prognosis for crude oil consumption is bearish despite overproduction. The Obama administration has made it a point to tout energy efficiency, a reduction in the use of fossil fuels and alternative fuel sources as well. This movement has been adopted by the progressive Democrats in the campaigns of Bernie Sanders and Hillary Clinton. A continuation of the Obama administration's policies will accelerate under a new Democratic president.
Whether or not the Republicans have any possibility of reversing course will depend largely on who they nominate, with Ted Cruz, Marco Rubio and Donald Trump as the leading candidates.
And then, of course, there is the elephant in the room to which Benjamin Netanyahu made reference in 2014 and 2015, Iranian oil production. As it stands, the global community led by the United Nations and International Atomic Energy Agency wiped the slate clean for Iran to re-enter the global arena and sell crude oil en masse. Upward of 500,000 barrels per day, perhaps even 700,000 barrels per day of crude oil, will be pumped out by this Middle Eastern producer before the end of the year – despite crude oil price weakness and global oversupply. The Iranians are hellbent on making up for lost time, and they already have several buyers lined up in Italy, the U.S. and the United Kingdom.
It's all systems go for massive amounts of crude oil purchases over and above the millions of barrels already being supplied to countries like Japan, Turkey, Russia and China. Incidentally, China has been taking advantage of the relative weakness in the price of crude oil and has been stockpiling massive quantities of crude oil inventories in 2015 and 2016. It is precisely this type of behavior that is prolonging the oil price weakness we are currently seeing.
Taylor and many others like him are firmly of the opinion that oil prices in the region of $100-plus per barrel will likely never return again. The technologies that we are seeing being developed for automobiles and aircraft are allowing for lower levels of fuel consumption by way of increased efficiency. This does not bode well for anyone who has designs on increasing oil prices any time soon.
The numbers of traders, analysts and investors who are taking long positions on crude oil are diminishing, and this is evident across the spectrum. There are short-term benefits to be gained in the form of binary options trading and short-term spikes or drops in demand as a result of knee-jerk reactions to negotiations between OPEC and non-OPEC countries, reports of rising or falling U.S. oil inventories levels and so forth. The U.K. is consuming lower levels of oil overall, and this is irrespective of the price of crude oil. This is largely due to the energy efficiency measures discussed above.
Has crude oil bottomed out or not?
Just when we thought it was safe to call the bottom on crude oil, the bottom fell out. Therefore conventional wisdom dictates that it is best not to call the bottom, but to accept that oil is trading at multiyear lows and may continue to move on its current trajectory as long as the global situation remains as fragile as it is. It is clear that we’re moving toward a place where oil price declines will slow down, but we aren't there yet. The flip side of the coin is that major oil companies in Shell (RDSA, Financial), Total (TOT, Financial) and British Petroleum (BP, Financial) believe that oil prices in the region of $60 per barrel are possible within the next two years. In any event, tightening in the oil markets is coming as inventory levels are increasing at a decreasing rate, sometimes even decreasing. Therefore it is not outside the realms of possibility that oil could be trading in a range between $40 and $50 by the year's end.
Key facts about the Vitol Group
Vitol has a fleet size comprising 200-plus deployable ships and trades 8.9 million tonnes of LPG (gasoline), 19 million tonnes of Naphtha and 34 million tonnes of coal. The company generates $270 billion in revenues and has 7,500 employees and 40 offices globally. It also operates five refineries and 2,700 petrol stations.
