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Editorial/Opinion

 

Fiona Maharg-Bravo : Oil is grounded
in a sub-$60 bear market




Oil drilling rigs sit idle in Helmerich & Payne International
Drilling Company's yard in Ector County, Texas , 2015


 

The oil price is grounded in a sub-$60 bear market. On July 6, Brent crude fell over 6 percent on the back of worries about Greece and the prospect of an Iran nuclear deal. The latter has a much bigger, if delayed, impact. Oil steadied on July 7 to just above $57 a barrel, but plenty of other factors are likely to keep a lid on prices.

On one level, the steep drop looks overdone. True, the outcome of the Greek referendum has shortened the odds on its exit from the euro zone. But equity and bond markets greeted the news with relative calm on the assumption that the European Central Bank will respond to any signs of contagion by cranking up bond purchases.

More critical is the culmination of negotiations between Iran and Western powers to curb its nuclear programme and end sanctions. Iran's oil exports have nearly halved since sanctions were imposed in 2011 and 2012, according to the U.S. Energy Information Administration. It has several million barrels in storage. The return of around 1 million barrels of oil a day could add about 1 percent to global crude supplies.

Yet the Iran deal is hardly unexpected after the parties agreed a blueprint in April. What's more, it will take time before Iran can ramp up exports. Analysts at Societe Generale don't expect volumes to be significantly higher until mid-2016.

So why the knee-jerk reaction? Brent recovered 1.5 percent on July 7, but it's well below the near $68 it hit in May. The market has other worries. While the China stock market rout occupies headlines, the slowing Chinese economy is the fundamental worry there. On the supply side, U.S. oil rig count also rose for the first time in 29 weeks last week.

U.S. shale production is also proving more resilient than expected. Lower drilling and pumping costs, among other efficiencies, have pushed the breakeven cost of shale down to about $60, Goldman Sachs estimates. That's above the current price, but there is probably room for more efficiencies at the major shale reserves. And this will only make Saudi Arabia more determined to pump as much oil as required to maintain market share as OPEC kingpin. Expect crude prices to remain subdued.

 

 

Fiona Maharg-Bravo has BA/MA (Phi Beta Kappa) from the University of Chicago in Political Science and International Relations and a Diploma in Economics from Cambridge University, is breakingviews Madrid correspondent and the opinions expressed are her own. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was published by Reuters, on July 8, 2015. Petroleumworld reprint this article in the interest of our readers

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

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