The Petroleum Economist Energy Strategy Forum
The oil industry facing the challenge of weak prices yet continue to grow and innovate.
26th January 2016
Sheraton Hotel, Kuwait
It is my pleasure to welcome all of you to the state of Kuwait for the Second Energy Strategy Forum. Let me start by expressing my deep appreciation to all the distinguished guests who decided to participate with us in this important forum, especially HE the Iraqi Oil Minister Adel Abdul Mahdi, and to the organizers of "the Euro money".
The current oil fall have taken all by surprise, with the price of Brent crude slumping from $115 a barrel in the summer of 2014 to a 12-year low below $30. Commodity prices, like most others, are determined by two factors: supply and demand. A number of potential catalysts could drive oil yet lower.
The current weak crude oil price is posing great challenge not only to all producers, but also, to the World where demand continue to grow. This would require large investments to ensure enough supplies are available to meet the growing future demand and avoid volatility as well as hike in crude oil prices.
We know that the current imbalance in the oil market is caused by the surplus of crude production, especially outside OPEC and has stimulated the fall in oil prices.
Chinese economic slowdown have sparked further weakening in the oil price. Besides warm weather, along with forecasts of relatively weaker demand for oil in 2016 than in 2015.
Oil supply in the market is set to rise, as Iran attempts to increase its production with effect 16 January 2016, and US shale is somewhat resilient to weak price. A combination of these factors pressure oil prices to fall further.
Monetary policies have moved to the forefront of the economic analysis. The mid December decision by the US Federal Reserve to raise interest rates by 0.25 percentage points represents an important shift in the monetary policy landscape. This decision represents a positive signal that US economic growth is healthy has taken it.
The expectation of rising interest rates in the US in recent months has been a factor behind capital outflows from emerging economies, which have led to a depreciation of their national currencies, inflation pressures, and eventually lower industrial activities, particularly in China.
These have dampened economic growth and slowed the increase in oil consumption. In addition, the expectation of a continued appreciation of the US currency supported a significant rise in the US dollar value versus other major currencies, which weighed on oil prices.
In the Euro-zone, Japan and China, monetary stimulus helped support economic growth in 2015, contributing to an improvement in oil demand growth.
In India, further accommodative monetary policy along with a continued economic recovery also led to better-than-expected oil demand growth in 2015
While the pace of the fall in oil prices continue, resulting in lower oil revenues, all oil producers have decided to utilize weak oil prices environment to commence a period of reforms. All countries in Arabian Gulf region, have announced reforms to revisit subsidies policies and call for rationalization of overall cost.
Kuwait is, also in moving in that direction as HH the Amir of Kuwait SH. Sabah Al-Ahmed Al-Sabah, has clearly highlighted a road map to adapt and overcome the difficult times and challenges that are ahead of us.
Some well-defined strategies will be carefully and gradually implemented which would include;
(1) Lifting of subsidies for retail product prices as well as for electricity
(2) Energy efficiency as well as rationalizing of consumption.
(4) Transforming government buildings to be green and environmentally friendly, besides, solar gas stations are established as well as more power generation based solar energy are also planned.
(5) Diversifying economy to be less dependent on oil,
(6) Reducing overall costs as well as optimize and rationalize expenditures;
(7) Reducing the government budget for next year 2016-2017 oil price assumption to be at 25$/Bbl. for Kuwait crude, which would entail revisiting all spending patterns and prioritize plans to be within the agreed budget.
However, we recognize that MEGA projects that are strategic and necessary for Kuwait growth will continue to be on top priority list for execution, to ensure the smooth expansion of Kuwait oil economies and the fulfillment of its international role in meeting energy security.
Kuwait crude oil production is running at around 3 million barrels per day and soon towards the end of the year, production will reach 3.15 million barrels per day.
I wish now to discuss the road towards stable and balanced oil markets once again
(1) Oil prices cannot remain at very low levels for long time, and will certainly recover and bounce back to levels that are more acceptable.
(2) Having two years of reduction in investments' allocations for upstream on global basis will certainly not be for the well-being of the industry, and hence oil prices will need to recover to the acceptable levels that would stimulate adequate future investments.
(3) The current imbalance needs an international commitment to draw the surplus and the high levels of stocks from the market, which mean an effective cooperation from outside and inside OPEC to rebalance markets again.
(4) OPEC role is vital and essential for the rebalance of the markets.
(5) OPEC will be in a better position to resume its role once all its members are back to the oil markets producing at normal historical levels.
(6) OPEC have succeeded in the past, and I am sure OPEC will successfully overcome current challenge of weak oil prices, but probably more time is needed.
(7) I optimistic and believe that they are many developments that are taking place to rebalance the market though this might take longer time.
In conclusion, Kuwait Energy Strategy Forum offers an important opportunity through its three focused sessions that addresses the dynamics of global oil supply and demand balance, the downstream, Petrochemicals as a means to diversify economy, and views of the international as well as local banks on how to finance future projects.
Thank you for your attention.