(EnergyAsia, February 11 2015, Wednesday) — Selling has resumed after last week’s show of strength from short-term covering had helped crude prices stage a brief rally. North Sea Brent is trading above US$56 a barrel while US WTI is just about holding onto the US$50 support.

Through January, the oil markets clawed back a wee bit of its recent massive losses, igniting hopes that this could stanch the selling pressure and set the stage for stability in the coming weeks. It appears it is still too early for that, judging from comments made by oil executives in Saudi Arabia, the Organisation  of Petroleum Exporting Countries (OPEC) and America’s shale-based companies who are in favour of letting market forces run their course. The market’s leading prophet, Citi’s Edward Morse, has just issued a call for crude to continue sliding, right into the US$20s before anyone can consider the prospects of a real recovery.

The industry’s most important official, Khalid al-Falih, CEO of state-owned Saudi Aramco, said the kingdom could raise and sustain production beyond the current level of 9.8 million b/d to snuff out the potential long-term competition posed by North America’s shale-based and oilsands operators. It was a stark reminder that Saudi Arabia can drown the markets for a protracted period of time with its 12-million b/d capacity.

In comments to the Middle East Economic Survey (MEES), Saudi oil minister Ali al-Naimi added to producers’ worst fears by stating that it was “not relevant” to OPEC if the crude price fell to US$20 a barrel, and that the world may not see US$100 oil again.

The kingdom has the support of OPEC’s leading members as well as Secretary General Abdulla al-Badri who is standing firm on the cartel’s position to defend its stay-the- production course despite the pleas for restraint from weaker members like Iran, Venezuela and Nigeria.

Geopolitics ignored, again

Last month’s death of Saudi Arabia’s King Abdullah had a one-day positive impact on oil prices before resuming their decline. The markets yawned when King Salman took over, unconcerned that the 78-year-old may be suffering from dementia, has a history of supporting the same extremist elements now aligned with the Islamic State (ISIS) that has vowed to behead US President Barack Obama and attack the West, and may have difficulty controlling the next level of slightly younger princes eager to take power before the good times are over.

For the first time since its emergence last June, ISIS succeeded in testing Saudi and Israeli defences by launching separate quick and deadly attacks on border patrols.

ISIS militia have attacked Kirkuk and the nearby town of Maktab in the oil-rich part of northern Iraq, breaching the city’s defences for the first time at the end of January. After killing Brigadier General Shirko Fateh, a senior Kurdish commander, ISIS claimed its troops now control parts of south and southwest Kirkuk.

These events were not cited for causing crude’s 8% surge on the last trading day of January.

Rather, traders said covering and profit taking on large short positions helped North Sea Brent climb back above US$50 to settle at US$52.99 per barrel and US WTI to US$48.24.

Crude holding around or below US$50 a barrel

Despite the appearance of volatility, the crude markets have been trading within a reasonable price range for the first time since crashing from their highs of US$100 to US$110 a barrel in last June. With Brent holding within a range of US$48 and US$58 a barrel and WTI about US$4 lower, there appears to be near-term stability.

Analysts are divided over whether this represents a lull before the next leg of the market’s sustained plunge or the medium-term floor for its eventual recovery.

Some are calling for prices to slide to the mid-$20s while the International Energy Agency (IEA) believes a recovery will take hold later in 2015.

OPEC’s secretary-general, Abdullah al-Badri, was more than hopeful when he told Bloomberg that crude prices could spike all the way to US$200 a barrel if the industry failed to make new investments amid the present carnage.

In its January report, the IEA said it has detected “signs” that the tide is turning in favour a price recovery.

As a result of weak prices, the agency has reduced its forecast for US production growth in 2015 by 75,000 b/d to 850,000 b/d and for Canadian output growth by 95,000 b/d to 220,000 b/d.

UK-based consultant DW said oil prices are being held down by oversupply, but suggested it may not be for too long.

“Production from wells declines naturally at some 9% p.a., and even with costly intervention at perhaps 5% p.a. With global demand at some 92 million b/d, this suggests a requirement to replace in excess of 4.5 million b/d of production in 2015 and more in 2016, etc., but where will the new oil come from?” it asked.

Citing the IEA, it said US oil production may grow by 500,000 b/d in 2015 but could start to peak as early as 2016.

“Investment in production is already being hard hit. Around 400,000 low output stripper wells each pump less than 10 b/d, but in total produce three-quarters of a million b/d and are prime candidates,” it said.

At the other end of the scale, BHP Billiton has said it would cut back on its planned US$4 billion spending on its US shale assets.

Offsetting these losses, DW said projects underway worldwide will add production to complement OPEC’s near 2.5 million b/d of spare capacity.

Making the case for a possible price recovery as early as late 2015, DW said the market may see a balanced state soon, and then encounter insufficient supply and rising prices.

“Furthermore, we must not forget there is always potential for supply disruption, OPEC has at times lost some 2 million b/d, non-OPEC producers near 1.2 million b/d,” it said.

“Unless we keep adding production, surplus capacity will be quickly eroded. The next oil price surge is already being set up.”

Canada’s RBC bank also read the IEA projections as being positive for crude prices on account of the agency reducing its non-OPEC supply forecast by 350,000 b/d to 57.5 million   b/d for 2015.

Impact of currency movements and weak oil prices

OPEC cited the surging US dollar as another contributor to the recent decline in oil prices. At the same time, it observed that the depreciation of the euro, the yen and some emerging market currencies has had limited impact on oil demand so far.

But, it said oil demand growth in emerging markets could be negatively affected if the US Federal Reserves bank were to raise interest rates earlier than anticipated as this might lead to “significant capital outflows from these countries” that would slow down their economic activities.

At last month’s World Economic Forum in Davos, the chief executives of two European majors expressed their concerns if current conditions remained.

BP’s Bob Dudley told the BBC that he expects oil prices to remain low “for up to three years” while Claudio Descalzi of Italy’s ENI said the oil industry’s decision to slash capital spending in response to the price collapse has set the stage for crude to hit new highs of US$200 per barrel in coming years.

Both executives also cited the long-term threats from field shut-ins and job cuts that would be difficult to restore when demand catches up with supply.

The North Sea is particularly vulnerable as several of its smaller fields are in danger of being idled as companies either stop investing to maintain production or even pull out.

Unlike shale, the harsh operating conditions of the North Sea’s deepwater fields demand expensive long-term investments.

Are we done selling yet?

The doubting Thomases want more evidence before subscribing to oil’s alleged impending resurrection.

While shale and conventional oil producers are announcing reductions in rig counts and budget expenditures, they are not fully convinced the glut will be so quickly removed from the bloated markets.

There are significant short positions yet to be covered including bets on US$30 oil amid reports of traders and producers chartering record number of tankers to stockpile surplus crude on the high seas.

Not all shale producers are threatened by WTI sinking to US$40 while those that are will continue to produce as it will be more costly for them to shut down operations.

Prices are more likely to go lower than hold unless ISIS succeeds in shutting down Iraq’s estimated production of 3.9 to four million b/d or the US sharply scales back its estimated 9.3 million b/d production in response to weak market conditions.