By Desie Heita
WINDHOEK – Fuel prices decreased 60 cents per litre today, a fifth decrease since July last year, as announced by Ministry of Mines and Energy.
This is purely because oil has become so abundant that the market is no longer running after it. The global market’s hawk eyes are now on how long the downward shift in prices would last and what ripple effects it would have on global economy, especially the private, corporate and countries investment exposed to oil market.
The global market is now literally flooded with oil, which was once called the black gold, because of its rarity. This prompted investors and money market speculators, who for years, influenced the prices of oil more than the motorists who use it for commuting, not to buy up oil. The global money markets are responding accordingly.
“At present, everybody is overproducing, Russia just set a post-Soviet record for production. Saudi Arabia – the biggest swing producer – has indicated it will keep pumping its low cost oil wells even if prices fall to US$20 per barrel,” commented Forbes contributor Peter Kelly-Detwiler.
Currently Russia’s oil output is the highest since the Cold War era, with an average 10.58 million barrels per day, thanks to new small independent oil companies, according to the Russian Energy Ministry. Previously all oil production in Russia was from state-owned oil entities.
Iraq’s post-war government has also been able to pump more oil for export from the country’s southern terminals, which in December 2014 reached the peak export sales last seen in 1980.
The United States no longer imports as much oil flooding the world’s markets with oil further increasing world supply.
The new oil suppliers found the global market reeling from the shocks of supply disruptions caused by turmoil in Libya, which reduced the supply of ‘sweet’ – cheaper to refine – crude oil in the market more than a year ago.
“New supply has entered the market, offsetting Libya woes. Additional exports are coming primarily from Russia and Iraq,” said US’s Morgan Stanley analyst Adam Longson.
Compounding matters is the stance of the Organisation of Petroleum Exporting Countries (OPEC) to not cut the official production target of 30 million barrels a day, about a third of which comes from Saudi Arabia.
“Saudi production is probably among the cheapest in the world and that government has banked a large fortune in oil riches that will help the kingdom ride out the current low prices. The lower price produces a bigger impact on other OPEC members, particularly Venezuela, Angola and Algeria. All of them have been vocal about cutting production to raise prices,” said Minister of Mines and Energy Isak Katali.
The international oil price drastically declined from about US$110 per barrel in June 2014 to below US$60 per barrel by the end of December 2014. It changed the market fundamentals. The weakening of the Euro did not help matters, as it only reduced the purchasing power of euro holders for dollar-denominated oil.
Lower international oil prices are always good for Namibia’ National Energy Fund which the Ministry of Mines and Energy uses to subsidise fuel prices. Namibia relies on oil bought in open market to fuel the economy.
It has however destabilised major foreign currencies and with effects on global markets. The two crude oil benchmarks – Brent and US light crude – have lost more than half of their value since mid-2014.
“Almost all market news and the fundamental backdrop are negative and it is difficult to see much upside at the moment,” said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt.
“Crude prices will have to rise again as exploration and development slow down because low prices cut off capital funding. Gradually, supply will drop below demand and prices will begin to rise again. How far it will go and how fast it will happen remain the biggest questions,” said Katali. – Additional reporting by Reuters.