Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Will Oil Prices Rebound in 2016?
Interview With Carl Larry
Oil Price, Al-Jazeerah, CCUN, January 22, 2016
Nick Cunningham of Oilprice.com recently spoke with Carl Larry,
Director of Oil and Gas at Frost & Sullivan, a consultancy that conducts
research on oil and gas markets, to get his thoughts on the state of oil
Oilprice.com: I saw that you were on Bloomberg in
December, and you said that you thought oil would go to the low $30s per
barrel, which was a good call at the time, before OPEC would sort of
relent. Do you see any chance that OPEC can actually coordinate any
Carl Larry: No, you know, at this point I think
that there is something to consider...that OPEC up until now most people
had thought that the Saudis and the rest of OPEC were really pushing hard
to slowdown or stop altogether shale production in the U.S. But what it
seems now is that they are really fracturing OPEC, and in some ways almost
undermining their own members.
So with oil prices down here and
with production staying so high, it becomes a point where it's
unsustainable for countries like Nigeria or Venezuela to continue on.
I mean, other countries within OPEC are still struggling with these oil
prices, including Saudi Arabia. But you can see that going forward that
the more that the pressure stays on those countries that are outside of
the Middle East, it's possible that they are the ones that are going to
have to blink first. They are the ones that are going to have to cut back
OP: So countries like Venezuela or Nigeria...do you
actually see them shutting in production?
CL: Yeah, I think so. I
think that it's possible. It's a theory, but it's possible that when Shell
pulled out of the U.S. Arctic a few months ago, they said that they wanted
to cut costs. But I think that they were just shifting some of the budget
that was there to uphold and maintain production in areas like West
Africa, like Nigeria.
So, you know, it's going to come to a point
where there is just going to be no real economical benefit to any kind of
production staying at any kind of level in those countries. And once they
come off, that's going to obviously support oil prices, but it might have
a lingering effect as oil production will take longer to get back online
OP: Countries like Venezuela and Nigeria...their budget
situations are much more precarious, as you said, than the Saudi Arabias
of the world. What would you see as sort of a worst-case scenario? What
would real trouble look like in Venezuela? Is that like a debt default, or
CL: A debt default would definitely be something that comes
up and it's not that something that's too far out of reach. There are a
lot of oil companies that have said recently that they are cutting back
their credit with Venezuela. They are not shipping as much gasoline or
blending products to Venezuela in fear that they won't get paid and
actually not getting paid up to date. So as you see those problems build
up, you can tell that this is going to happen. This could happen sooner
It is not unlike situations we have seen around 2009
when banks that were dealing in commodities were second guessed because of
their credit situations. So when you look at a country like Venezuela and
compare it to Morgan Stanley in 2009 when people were pulling credit
quickly, you can see that Venezuela is definitely at risk here, possibly
OP: OK. So recently the narrative around oil prices
has sort of shifted a little bit and the emphasis now has been more on the
strength of the U.S. dollar. How do you see this affecting oil prices in
2016? Is there more room for the dollar to strengthen? And do you see the
Fed sticking to its plan of incrementally raising rates?
think the dollar continues to be stronger. I think the Fed does have
enough to say that they can continue to raise rates. There is not a lot of
downside there. I don't know if they will be able to keep to their
schedule for this year, but even with two or three [rate increases], that
will make a difference in the U.S. dollar.
And again, it's going
to hurt other countries that are producing oil, especially countries that
are trying to maintain...you know, trying to buy new equipment, trying to
maintain old equipment that mostly comes from the U.S. That's going to
hurt their purchasing power for those materials, those commodities, and
OP: The IEA just came out with their monthly
report this morning. The headline-grabbing sentence that they had in there
was that oil markets might "drown" in over-supply due to rising
inventories. Do you see storage levels, rising storage levels, being a big
problem in 2016?
CL: I do. I think that there is definitely
concern about storage outside of the U.S. as storage outside of the U.S.
is limited. Most countries that do have storage are using it mainly for
reserves outside of the [Amsterdam-Rotterdam-Antwerp] area in Europe. So
there is a lack of storage and it is something that a lot of companies are
looking to build out, and even countries are looking to build out, but
that's not going to be solvable until 2017 anyways. But that could be an
issue. Even though that oil has value, it has no value unless it can go
somewhere, whether that's to a consumer or storage. Neither is looking
good right now.
OP: Does that open up the possibility of floating
CL: It does open up the possibility of floating storage.
We have seen Iran do it. Now that Iran is going to lighten those loads and
hopefully dismiss those tankers, there are going to be a few extra tankers
on the market, rather than just thinking of it as a lot more crude on the
market. So that's definitely a possibility. I think the U.S., though, is
still in a position where if they wanted to increase their storage we
could see a lot of that open up by decreasing our imports, which is still
OP: The IEA sounded pretty downbeat about the
global economy in its report and the IMF just downgraded its growth target
for the global economy. Do you see big downside risk to oil prices from a
faltering economy? You see turmoil in China's stock market...is that a big
CL: You know, it is. And it's really important to look at
it that way. But we have to look at it in a Donald Trump-sort of way:
There's us, and there's them. The U.S. is not even at 2 percent [GDP
growth]. It is running record levels of crude oil the last two years
consecutively...new records made each year. So our demand here is still
good. It is going to grow, it's going to continue to as long as we stay at
that 2 percent growth.
When you talk about global growth, that is
detrimental. That is shaky, at best. That is where there is a real oil
glut. If the China's, the Europe's, the Latin America's, and the Asia's
cannot keep up, and they see declines, you are going to have much bigger
oversupply through 2016, and that will be a big problem.
dramatic cutback in spending plans on behalf of the oil industry
worldwide...Do you see that setting us up for a price spike? Or are we
still just so oversupplied that that won't matter for quite a while?
CL: I think that if there's a cutback in oil industry spending, if
there's a cutback in oil production in countries like the Venezuela or
Nigeria, we will definitely have a
supportive push in 2016 for oil
But yes, I do think that down the curve, 2017 and 2018, if
demand continues to pick up, there's going to be a bigger chance of a
spike. So we can hold a range for a year, maybe a little bit longer than
that. But past that, there's definitely a threat of spiking back up if
demand stays on pace.
OP: In a similar vein, not a lot of people
are talking about the incredibly small level of spare capacity that OPEC
has sitting on the sidelines. Saudi Arabia is producing pretty much flat
out and only has a little over 1 million barrels per day sitting in spare
capacity. So, do you see that as an issue? Could a supply outage in
Venezuela or Nigeria or anywhere else actually force up oil prices because
we have limited capacity to address that outage?
yes. Three, four years ago, absolutely. We could see a spike because of
that lack of ability to get more oil online outside of Saudi Arabia. But
the game has changed in the last few months even. The U.S. is producing 9
million barrels per day. We are importing 3 million from Canada alone.
So if prices were to go higher, I think that production in the U.S.
could increase and even in Canada. And the difference now is that the U.S.
can export crude oil. So if there is a lack of supply out there, the U.S.
does have the ability to kind of make up some of that ground if necessary.
So that's the game changer here. The U.S. lifted the export ban and the
high U.S. production, including Canadian production and possibly even
Mexico...we could probably make up for that a lot faster than we could
have in past years.
OP: Interesting. So, lifting the export
ban...how do you see that affecting the oil markets? It sounds like you
are saying you think it opens up the possibility of a sort of a second
spare capacity coming from U.S. shale. How will lifting the export ban
affect oil markets in 2016?
CL: It definitely puts another
competitor into the market. Even though it is oversupplied there's a lot
more value in being a consumer and an importer and exporter to the U.S. So
a country that is trying to build up trade might want to buy crude from
the U.S. with more interest than they would from another country, whatever
country that may be.
So there is that to think about, building
relationships and trade back and forth between countries, is a big deal.
Now that the U.S. is able to do so, that might put us in a favorable spot
with a lot more consumers. So I think that this year we are not going to
see too much of that pushed forward, but it's something to keep an eye on.
I think that our exports could definitely grow this year, now that the
export ban isn't there. To places that are already being supplied by other
countries, we might be able to step in and step up.
OP: Do you see
any risk to the oil markets from the conflict between Iran and Saudi
CL: You know, that is definitely an issue. I think that
the biggest difference now, again, only in the past few years we are
seeing the U.S. and other western countries that are staying out of the
fray. As long as that happens, there is a chance that anything could
happen, and that is not good for anybody. But when you think about the
risk-reward...North Sea in Europe, or Russia at 10 million barrels a day,
or the U.S. with the ability to climb up and down and export crude,
conflict in the Middle East would definitely raise prices but it would
definitely be an advantage to countries that are now starting to pick up
OP: And finally, the answer to the question that
everyone wants to know: where do you see oil prices going this year?
CL: Well, I think the funny thing is that in past years we have all
had a price target, where we all forecasted. Now I think it is about a
range. It's about where are oil prices going to stay in the next year and
probably the next couple of years, at least with this pace of economic
growth and oil production.
So, I'd say between $35 and $55 right
now. And I think to narrow that down I'd probably say that
$45 to $48 is
going to be an average price for the year. And I do think that there is
definitely more risk to the upside than there is to the downside at this
OP: And do you see that persisting through
2017, or going
up dramatically, or is it just too hard to tell?
I think it
goes up. I think that definitely the tensions in the Middle East are not
going to go away. That is something that is historically not going to go
away. It is never going to go away. I think that if there are more
economies that slowdown or break off from production, we could definitely
see that issues like growth in the U.S. pick up the pace of WTI price more
than Brent. So I definitely think that is something that could continue
over the next couple of years.
OP: Carl, Thank you very much.
CL: Alright, thanks so much.
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