Opec: Chinese stockpiling will support oil price

Lower oil prices will likely encourage more Chinese stockpiling of crude, which will help boost both demand and prices, an Opec official said yesterday.

Oil prices have nearly halved since June, driven lower by weaker growth in Europe and Asia and an oil glut. Arab ministers have blamed non-Opec suppliers for the oversupply, which is expected to continue to hurt prices. Opec decided on November 27 to keep its output unchanged at 30 million barrels of oil per day despite the oversupply.

"The boost for growth from lower oil prices could even see demand increasing. In particular, Asian buyers are keen to stock up on oil at lower prices," said Ali Obaid Al Yabhouni, the chairman of the Opec board of governors. "One area where demand is likely to grow is from the build of Chinese strategic stocks."

He was speaking at a conference for the Organization of Arab Petroleum Exporting Countries (Oapec).

“As oil prices reach a low level, we can expect the Chinese to increase their acquisitions of oil destined for strategic reserves. Not only will this benefit shipping companies, but it will also support the oil price levels.”

China is expected to have a total reserve capacity of about 500 million barrels by 2016, according to the International Energy Agency, the energy adviser to industrialised countries.

The drop in oil prices, though, will impact Arab energy investments, according to the Arab Petroleum Investments Corporation (Apicorp).

Energy investments in the Arab region will average US$685bn in the next four years, a figure lower than previous years. Apicorp had estimated last year that energy investments between 2014 and 2018 would be about $700 billion.

“In the context of subdued economic recovery, continuing geopolitical turmoil and collapsing oil prices, our review of energy investments in the Arab world has established that compared to past review, minimum capital requirements are likely to decline or remain flat at best over the medium term,” said Ali Aissaoui, a senior consultant at Apicorp, adding that Saudi Arabia, the biggest spender, has completed many major projects as well.

About three-quarters of these investments between 2015 and 2019 will come from the biggest holders of oil and gas reserves, led by Saudi Arabia, followed by the UAE, Algeria, Iraq, Qatar, Kuwait and Libya. There are major constraints for investments in energy, including the scarcity of gas, escalation of project costs and accessibility funding, he said, with the likelihood of project costs rising beyond inflation figures.

Equity financing will suffer, as low oil prices mean that countries will be constrained because their break-even prices to balance the budget will not be met.

“Policy markers should focus their policy on improving the investment climate and creating a more enabling environment for the development of the oil, gas and power investments,” said Mr Aissaoui.

Governments also need to tackle subsidies and overconsumption to make exploration for new resources more profitable.

GCC governments will continue to invest in projects to maintain their market share. Lower oil prices will also drive investments away from high cost production such as shale to the Middle East region, Mr Yabhouni said.

“Clearly everyone needs to tighten their belts. The bonzana is over and as investments in the North American shale and tight oil and gas industry come to a slow halt, we can expect that service companies and contractors to converge on the Arab world, where investments will certainly continue, and increased competition in their region will lead to decline in costs to more reasonable levels.”

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