Crude oil prices edge higher amid raging battle for market

Total Chief Executive Patrick Pouyanne attends the St Petersburg International Economic Forum on Saturday. He has termed the pact between OPEC and its allies to extend production cuts ‘a good deal’. [Photo: Reuters]

A crude price in the $50s (Sh5,150) is the new reality for bosses of some of the world’s largest producers as output caps from Organisation of Petroleum Exporting Countries (OPEC) and its allies are balanced out by rising US shale.

The rise in crude oil prices at the international market comes as Kenya readies to export its first batch of crude oil later this month under the Early Oil Pilot Scheme.

Executives of energy companies from Royal Dutch Shell Plc and BP Plc to Russia’s Lukoil PJSC and Gazprom PJSC, who gathered last week at the St Petersburg International Economic Forum, see an oil price of $50 (Sh5,150) to $55 (Sh5,665) at least for this year.

“Unless something extreme happens, we are not going to get back to much higher,” IHS Markit Ltd Vice Chairman Daniel Yergin, author of the definitive history of the oil industry, said in an interview at the conference on Friday.

“The exception was $100 (Sh10,300) per barrel, that was an aberrant period. The industry is recalibrating to a lower price level.”

This means Kenyan oil will be going into the market at a higher price and is likely to fetch a premium once the Government finds a buyer.

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Three firms have already been awarded contracts with a combined value of Sh1.5 billion to transport crude oil from Turkana to Mombasa for the early oil pilot scheme.

Prime Fuels Kenya, Multiple Hauliers and Oilfield Movers – are expected to commence the movement of the 60,000 barrels by road.

After trading at around $100 (Sh10,300) from 2011 to 2013, oil slumped to about half that level in 2014 and stayed there as members of the OPEC battled for market share against a booming US industry.

While OPEC returned last year to its more traditional role of cutting output, prices have failed to mount a sustainable recovery amid another surge from American shale producers who have significantly reduced operating costs.

Oil prices fell last week after OPEC and allies including Russia agreed to extend their output cuts for another nine months through March 2018.

The slide deepened this week, with international benchmark Brent crude slipping below $50. Part of the problem is that production is increasing in members such as Libya and Nigeria, which are exempt from making cuts as they restore output after internal strife, said BP Chief Executive Officer Bob Dudley.

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In the view of Igor Sechin, the Rosneft CEO and close ally of President Vladimir Putin, shale oil is another problem.

Output could increase by about 1.5 million barrels a day next year, not much below the 1.8 million barrel-a-day cut implemented by OPEC and its allies. “A decrease in production under an agreement between OPEC and non-OPEC could largely be balanced out by an increase in US shale oil production by the middle of 2018,” Sechin said.

The pact between OPEC and its allies is “a good deal” and the market needs some “stable policy,” said Total CEO Patrick Pouyanne.

Even so, he said it’s difficult to predict if the deal could be extended further into 2018.

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