© Miswin Mahesh
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First off all, I believe that next two to six months the first few barrels are likely to be the ones in storages, as well as the ones they have ramped up in terms of incremental fields. However, we are not talking about half a million barrels per day number, since it is just roughly on a 100 and 150 thousand per day. The important thing is the composition of condensates, which is very light crude. That is quite high, and in terms of actually affecting the global market, we need the extra crude barrel at a margin. The second element is the way how Iran manages to get its new international petroleum contracts. At the moment they are debating with the parliament to find a fine balance between what we call the "impossible trinity". This balance should be good incentive for international oil companies and a fair share for the Iranian national oil company. Traditionally getting the contract passed by the Iranian parliament has been very nationalistic, whereas I believe that now it needs to be more opened up.
There are hardliners, which may say that we still need to give contracts to international oil companies on a more build-up-rate transfer model, rather than one that is applicable elsewhere. That sort of dynamic is present, which is why international oil companies are keen on going back. In particular, it has expressed a lot more interest than the rest, but at the end of the day they all agree that it depends on what the IPC contract looks like. Therefore, they are interested in getting 500,000 - 1 million barrel per day number out at least by next year. In our view, it does still look like a few hurdles there. Even before we get to the IPC part, we still have a few difficulties in terms of full sanctions release. We need to think about it being approved by congress. Even if it is not approved, it needs to be vetoed by Obama, which is very likely to happen.
The market seems to again focus on the supply situation and one of the difficulties is that Iran wants to come back, whilst there is no obvious sign that OPEC will make room for them. What will be the further OPEC actions in this situation?
At the moment we have OPEC production close to 31-31.5 million barrels per day, most of it is due to of Iraq increasing by 500,000 barrels per day and the fact that Saudi Arabia has ramped up by close to 700,000-800,000 barrels per day.If Iran comes back into the market by 500,000, close to 1 million barrels per day, there will not be any candidates from OPEC to voluntarily cut. Historically, it has been Saudi Arabia that has accommodated for Libya's return, or barrels returning from parts of Nigeria and Angola, due to some disruption. However, in this context, given the political dynamic between the Shia-Sunni divide between Iran and Saudi Arabia, it is not looking like Sunni would give in.
I suppose the best scenario would be that we still have sharp decline in rates like in Qatar for instance. Algeria is another great example, where production is declining roughly by 50 to 60 thousand barrels per day. However, that is not enough to accommodatee for 500,000 or 1 million barrels per day, which will be very tough. We need to remember that Libya is producing close to 400,000-450,000 barrels per day at the moment. If and when they also finally return, that is potential boost of OPEC together by 2 million barrels per day, both of them returning. That would be fairly big chunk of supply to eat through.
What other factors and events will determine oil performance and where do you foresee oil prices for the end of this year?
We believe that it is important to pay attention to the demand statistics that are coming through. We saw stronger refinery margins earlier on in the year, when the prices had fallen. That was largely taken as anecdotal evidence indicating that the underlying demand is high, because demand data itself is much lagged. One of the key tenants of our view is that global oil demand would surprise to the upside, in terms of where the data is now and where we see the inventory building up. It is possible that some of the numbers have gone into inventory builds are actually real demand. Currently, the ultimate clearing mechanism for markets is the price itself, and it would be a catalyst for not only reducing supplies in 2016, but also incentivizing stronger oil demand. We do think the current price levels are itself a good catalyst and that is where oil will be - at about $60 a barrel again next year.
Other key tenant of our view is that the OPEC production, even though it is on a seemingly high level at the moment, 31,500 million barrels per day, is not likely to continue at this pace, as Saudi Arabia will cut back some production. Most importantly, Iraq fractures also are sort of being seen in terms of northern and southern production terminals. I would say that there is bigger chance that Iraq production slows down materially than Saudi Arabia reduces. However, next year it will be the pace at which Iran returns to the market, and at which US shale slows down.