The main problem of the oil market is excess of supply over demand

By Vestnik Kavkaza
The main problem of the oil market is excess of supply over demand

Yesterday, on all television channels and news agencies news was reported that at a meeting between Russia and OPEC it was stated that the oil market will stabilize in 2016, and that prices will recover. As suggested by the Director of the Energy Directorate of the Energy and Finance Institute, Associate Professor of the Gubkin State University of Oil and Gas, Aleksei Gromov, the second message is absolutely wrong, "There was not a single word in the statements of [Russian Energy Minister Alexander] Novak, nor [OPEC’s secretary general Abdullah] al-Badri. It is only about the Organization of Petroleum Exporting Countries, and the Russian experts agree with that, expecting that in 2016 a balance of supply and demand can be restored on the market."

Gromov said that despite the drop in oil prices that we have seen since the second half of 2014 (and oil prices have fallen by half and there are small reducing trends forecast for the second quarter of 2015) on the market there is still a surplus of supply over demand. The level of excess is quite serious, ranging generally from two to three million barrels a day according to monthly statistics.

"Following the meeting of Novak and al-Badri, it was stated that OPEC will continue to pursue policies and as it was declared in November as a part of the OPEC conference and confirmed in the framework of the summer meeting of the leaders of OPEC. OPEC will maintain its quota of the market, it will wait for the demand for petroleum products in the world to recover in this period, and those projects and those competitors who today form the excess of supply over demand will leave the market,’’ the expert believes.

The Chief Advisor to the Head of the Analytical Center of the Government of the Russian Federation, Leonid Grigoriev, is sure that nothing dramatic has happened: "This is a good episode for journalists, but not for us. For us it is a normal event. Not common, but normal, because the level of the meeting is high, and in addition, everyone has realized that the eternal ‘raspberry’ of 100-120 US dollars per barrel cannot be eternal, but this was always known. The normal corridor is 60-80 dollars, just after Fukushima and Libya it ‘flew’ over a hundred. This was a kind of ‘gift’ from the political and catastrophic events. It was necessary to reinvest this oil, but exporters spent it on their own consumption and for current public spending, and did not invest as much as they could."

According to Grigoriev, "The history of mankind shows that the most expensive resource begins to be optimized with the help of technology. A large technical, technological revolution has begun. There are a lot of inventions, and we have already seen the effectiveness of them, but do not have millions of cheap electric cars, there is no Smart Grid which can transfer any energy of any quality, because there are significant barriers to the development of wind and solar energy. [Smart Grid is a modernized electricity network that uses information and communication networks and technologies to gather information about energy production and consumption, to automatically improve the efficiency, reliability, economic benefits, and the sustainability of the production and distribution of electricity – editor’s note]. The quality of electricity supply is impossible to store and it cannot be passed on."

Experts believe that "OPEC is not going to limit the quotas of production again, but still there is excess supply. No one can withdraw from the market, to reduce production, because it is full of free oil. Everyone is deciding to look at the natural course of events. However, the slowdown in China, slower growth in Europe, plus all sorts of technological changes, which are leading to a reduction in oil consumption, will have an impact on the market."