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Ceturtdiena 27.02.2020 | Name days: Līva, Līvija, Andra

SEB: investments in oil and gas industry down by half

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe oil marked brought unexpected turns in October – since the beginning of the year, Brent crude oil price has declined by approximately 30%: from USD 86 to USD 59.

«Looking at dynamics, it is impossible to ignore investors’ behaviour, considering they have reduced net positions by 40% since the beginning of the year (from 1.1 billion barrels to 650 million barrels). Investors started losing their confidence in April/May, when it became clear OPEC+ would reduce mining restrictions in the second half of the year. From that point on, Brent and WTI oil speculative positions started declining after reaching the highest point – 1.4 billion barrels,» BNN was told by SEB Bank macroeconomic expert Dainis Gašpuitis.

«Global financial market surveyed by S&P 500 index maintained increasing positions up until the beginning of October, when investors decided to change their positions. This is observed in the index and the dropping Brent price. Oil market conditions, meanwhile, have experienced changes – they have become less strict. This means more supplies (USA, Russia, Libya), less restrictive sanctions for Iran and slightly weaker global demand perspectives. The murder of Jamal Khashoggi has put Saudi Arabia in an off situation before Donald Trump, who proposed increasing production output and reducing prices. We can assume Saudi Arabia may have tried appeasing and supporting the president before elections in the Congress, thereby trying to put to rest possible problems. However, the change of heart from investors may have been another reason for price correction and sale of assets,» comments Gašpuitis.

According to him, on 6 December OPEC and ten partner countries will gather in Vienna to discuss the situation on the oil market. Until now this group has managed to keep world oil stores at a normal level. It is clear all OPEC+ countries have one goal: avoiding an increase of oil stores in the world. Oil producers hate that, because it forces them to sell oil with a discount. This is why countries will do what they can to reduce production output in 2019.

Currently the situation on the spot market fits the situation when OPEC+ may not introduce any new restrictions next year, the market will be ruled by an excess of supply, stores of oil will increase, and oil will be sold with a discount at spot market. This kind of scenario would mean oil price should come to a level in which it can stimulate shale oil production in USA and global demand, the economist explains.

«In USA, oil and hydro-carbon liquids production will have grown by 4.2 million barrels in the period between the beginning of 2017 and December 2018. Global demand has increased by three million barrels in the meanwhile. At the same time, supplies from other sources (Mexico, China, Venezuela, Azerbaijan, Angola and Iran) have declined by more than 2.1 million barrels. The main reasons for that include economic and geopolitical tension, as well as lack of investments. Investments in oil and gas industry have declined 50% in the period between 2014 and 2017. This influence is already partially felt. Usually there is a five-year cycle when investment decline starts translating into production decline. In spite of the current prices and general mood, SEB Bank expects oil prices to recover in the mid-term. More clarity may come after OPEC+ meeting in December,» says Gašpuitis.


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