The crystal ball looks murky when it comes to oil market

PUBLISHED : Wednesday, 04 January, 2017, 10:52am
UPDATED : Wednesday, 04 January, 2017, 10:49pm

As the new year settles in it’s time to get out that dusty crystal ball to predict investments prospects for the coming year…actually I’m kidding because predictions are a mug’s game and this particular mug has been round long enough to know that investment predictions rank somewhere up there with the expert political forecasts that served us so unreliably last year.

However there is one area of forecasting that I find hard to shake off, namely the prospects for the oil market, which in turn has a tremendous impact on other commodity prices and much more besides.

I have to confess that this is largely a sentimental attachment emanating from the job I once had of covering energy for the London-based Observer newspaper during the glory days of the Organisation of Petroleum Exporting Countries (Opec) – the oil producers cartel – nowadays you have to laugh at the very term cartel because so many key oil and gas producers operate outside Opec.

But back then, in the early 1980s, Opec was king and the King of Kings was the charismatic Saudi oil minister Sheikh Ahmed Zaki Yamani. Oh, how we hung on his every word and tittered as he delivered witty asides.

There was a large press pack covering oil back then and we had the “arduous” task of travelling around the world to loiter in Intercontinental Hotels, the venue of choice for these events, waiting for a hint of what these generally uncommunicative oil ministers were doing.

It turns out that a short play on oil was one of the best investments that could have been made last year

The apotheosis of ministerial non-communication came when the Opec presidency passed into the hands of the Nigerian oil minister Yahaya Dikko, who brought new meaning to the term taciturn. Towards the end of an interminable meeting in London, during which Dikko had said precisely nothing, the press pack only succeeded in getting a single word out of him while the meeting was still in session: in response to a question: “Minister: are you mute?” he gravely replied, “yes”.

The lesson I learned during this time was that the oil price was only peripherally connected to supply and demand and was swayed far more by politics and other investment considerations. I appreciate that this is largely a statement of the obvious but it is striking how often the obvious is forgotten.

In those heady days the price of a barrel of oil soared above US$100. Now oil trades around the US$53 mark. Amazingly this price, around half what is was over 30 years ago, comes after last year’s 47 per cent price rise which did little more than bring the price back to 2009 levels.

As a result of oil price movements in 2016, leading to expectations of an even bigger price rise, it turns out that a short play on oil was one of the best investments that could have been made last year. Looking in the rear view mirror to repeat this play in 2017 is almost certainly not a great idea.

An Opec ministerial meeting is due in May, following the meeting last November at which it was decided to cut production, a decision that met with the cooperation of non-Opec members, notably Russia, and had the affect of causing prices to blip upwards.

May is some five months away and in the meantime much can happen. Donald Trump’s enthusiasm for boosting energy self-sufficiency in the United States almost certainly means a boost for shale oil producers, which will largely have a psychological effect because lead times here are long but in the shorter term the market can be moved by, say, cash shortages in Russia that may rekindle enthusiasm for cut-price oil sales.

All we really know is that when the oil price moves it quickly impacts on manufacturing costs as well as the more obvious costs of transportation and a host of other areas where the price of oil determines input prices. Then there is the impact on currency values of oil producers and consumers and the more complex matter of investment reallocation based on anticipation of where the oil market is heading.

All we really know is that trading in this, arguably the most important of commodities, will hardly be solely determined by the laws of supply and demand. The price of oil has been political ever since it was internationally traded and because the global political scene is likely to be even more uncertain in the coming year we should expect oil price volatility to reflect this uncertainty.

The dusty crystal ball sitting in my office therefore remains clouded but is clear on one point, namely that although Opec can no longer be properly described as a cartel, the cartel of Hong Kong petroleum retailers remains very much intact and most certainly will keep prices at our pumps among the highest in the world.

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster