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Crude Oil Prices: Bangladesh Priorities

Global oil price continues to record downward trend. Consequently price of oil indexed fuel and oil derivatives are also on downward trend.

Oil price is very important for world economy. Developed countries have capacities for absorbing well price shock to some extent.

But developing and underdeveloped countries encounter huge crisis if oil price goes higher.

Many countries exclusively depend on oil revenue. Many developing countries have to depend exclusively on oil import and import of other oil indexed fuel. Hence oil price impacts on their economic growth and development.

Bangladesh for maintaining its impressive economic growth needs to import primary fuel from global market.

The fuel price is mostly oil price indexed. Present situation is the most ideal time for negotiating and concluding contracts.

Alongside mining own coal and expediting exploration of petroleum Bangladesh must proactively negotiate contracts for fuel import permitting private sector also  for importing coal and LNG.

Global politics often influence oil pricing. In the past global wars greatly influenced oil price.

But off late the situation has changed. Major buyer and USA has become self-sufficient from its oil resources.

Lesser and lesser oil import of USA has created surplus of oil in world market. Saturated supply of oil has caused continued decline of global oil price and consequent lowering trend of all oil indexed fuel.

Recent United States Energy Information Administration (USEIA) released statement indicates declining trend of crude and related fuel price.

Brent crude oil spot price decreased by $4/b in November 2015 to a monthly average of $44/b, as global oil supply continued to outpace demand.

Availability of Iranian crude in global has added to global liquid inventories. This has put significant pressure on oil price.

Even the continued war and tensions in Syria and Iraq and recent tensions between Saudi Arabia and Iran could not have any effect on crude price.

Energy analysts are well aware that the declining import demand of USA has catalytic impacts on world oil price.

OPEC countries declining to cut production kept the decline of oil price going.

Consequently liquid fuel inventory kept building up. Inventories rose by an estimated 1.8 million b/d through the first three quarters of 2015, compared with an average build of 0.5 million b/d over the same period in 2014.

Global liquid fuels inventory builds were expected to slow to an average 1.4 million b/d in the fourth quarter of 2015.

According to United States Energy Information administration the liquid fuel inventory is expected to slowdown to an average of 0.6 million b/d in 2016.

But this may not be the case as flow of Iranian crude in global market may not see that happen.

The monthly average Western Texas Intermediate (WTI) crude oil spot price averaged $42/b in November.

WTI prices in November were down $4/b from the average in October, as crude oil inventories at the Cushing, Oklahoma, storage hub increased in November despite rising refinery inputs of crude oil following seasonal maintenance.

EIA forecasts that Brent crude oil prices will average $53/b in 2015 and $56/b in 2016. The 2015 forecast is $1/b lower than last month`s STEO, and the 2016 forecast is unchanged.

Forecast WTI crude oil prices average $4/b lower than the Brent price in 2015 and $5/b lower in 2016.

EIA`s crude oil price forecast remains subject to significant uncertainties as the oil market moves toward balance. During this period of price discovery, oil prices could continue to experience periods of heightened volatility.

The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil reenters the market, the strength of oil consumption growth, and the responsiveness of non-OPEC production to low oil prices.

The current values of futures and options contracts continue to suggest high uncertainty in the price outlook .WTI futures contracts for March 2016 delivery, traded during the five-day period ending December 3, averaged $44/b, while implied volatility averaged 42%.

These levels established the lower and upper limits of the 95% confidence interval for the market`s expectations of monthly average WTI prices in March 2016 at $30/b and $63/b, respectively.

The 95% confidence interval for market expectations widens over time, with lower and upper limits of $26/b and $90/b for prices in December 2016.

Last year at this time, WTI for March 2015 delivery averaged $67/b, and implied volatility averaged 32%. The corresponding lower and upper limits of the 95% confidence interval were $51/b and $89/b.

Price Trends over the Last Four Years

Type of Commodity

2013

2014

2015

2016

WTI Crude Oil(1)

(Dollars per barrel)

  97.98

93.17

49.08

50.89

Brent Crude Oil

(Dollars per barrel)

108.56

98.89

52.93

55.78

Gasoline(2)

(Dollars per Gallon)

  3.51

 3.36

  2.43

2.36

Diesel (3)

(Dollars per Gallon)

3.92

3.83

  2.71    

 

  2.67

Natural Gas (4)

(Dollars per thousand cubic feet)

10.29

10.94

10.30

10.07

Electricity

(Cents per Kilowatt hour)

12.13

12.52

12.61

12.70

Coal

(Dollars per million Btu)(5)

2.34

2.37

2.24

  2.24

Heating Oil

( Dollars per gallon)

3.78

3.72

2.67

2.52

1.      WTI: West Texas Intermediate

2.      Average pump price

3.      On highway retail

4.      US residential average price

5.      Electric power generation fuel cost

Petroleum Product Prices

Lower crude oil prices contributed to U.S. regular gasoline retail prices declining to an average of $2.16/gal in November, down from an average of $2.29/gal in October.

EIA projects regular gasoline retail prices to average $2.04/gal in December 2015 and $2.14/gal in the first quarter of 2016.

The U.S. regular gasoline retail price, which averaged $3.36/gal in 2014, is projected to average $2.43/gal in 2015 and $2.36/gal in 2016. The diesel fuel retail price, which averaged $3.83/gal in 2014, is projected to average $2.71/gal in 2015 and $2.67/gal in 2016.

Lower projected crude oil prices this winter compared with last winter contribute to a reduction in the forecast residential heating oil price and average household heating oil expenditures.

Households that use heating oil as a primary space heating fuel are expected to pay an average of $2.40/gal this winter, 64 cents/gal lower than last winter.

The average household is now expected to spend $1,282 for heating oil this winter, $570 less than last winter. The reduction in expenditures also reflects lower forecast consumption because of warmer forecast temperatures this winter compared with last winter.

Propane prices this winter are expected to be 7% lower in the Northeast and 15% lower in the Midwest, contributing to households spending 18% and 25% less on propane in those regions, respectively.

We see from above that lowering trend of crude price has lowered prices of petroleum products.

Bangladesh must take advantage of the situation .There is no reason why Bangladesh cannot reduce price of furnace oil and motor spirit now. But it must first ensure that the price reduction benefits end users before adjusting price of diesel.

Natural Gas Prices

The Henry Hub natural gas spot price averaged $2.09/MMBtu in November, a decrease of 25 cents/MMBtu from the October price.

Warmer-than-normal temperatures in November, record inventory levels, production growth, and forecasts for a warm winter contributed to spot prices remaining at low levels.

Monthly average Henry Hub spot prices are forecast to remain less than $3/MMBtu through August 2016. The projected Henry Hub natural gas price averages $2.67/MMBtu in 2015 and $2.88/MMBtu in 2016.

Natural gas futures contracts for March 2016 delivery traded during the five-day period ending December 3 averaged $2.29/MMBtu.

Current options and futures prices imply market participants place the lower and upper bounds for the 95% confidence interval for March 2016 contracts at $1.51/MMBtu and $3.45/MMBtu, respectively.

At this time in 2014, the natural gas futures contract for March 2015 delivery averaged $3.84/MMBtu, and the corresponding lower and upper limits of the 95% confidence interval were $2.40/MMBtu and $6.13/MMBtu.

Bangladesh will have to rely significantly on imported LNG from not too distant future. The domestic price of natural gas in Bangladesh is among the lowest in the world. To absorb LNG price shock domestic gas price must be adjusted reflecting the cost of gas and import price.

Coal Prices

The annual average coal price to the electric power sector averaged $2.37/MMBtu in 2014. EIA expects the delivered coal price to average $2.24/MMBtu in 2015 and 2016.

Price of coal remained steady more or less. Bangladesh has plans for setting up several mega projects using imported coal.

Alongside implementing the various import facilities development activities Bangladesh must aggressively negotiatewith coal traders (exporters) for concluding long term supply agreements.

Private sector must be involved in importing coal and government alone may not be able to carry out exclusive responsibilities.

Electricity Retail Prices

The U.S. retail price of electricity to the residential sector is projected to average 12.6 cents per kilowatt-hour in 2015, 0.7% higher than the average price in 2014.

The largest price increases are in New England, where residential electricity prices are forecast to increase by 9.6% in 2015. In percentage terms, the largest electricity residential sector price decrease in 2015 is expected to be in the West South Central region (1.9%).

In 2016, the U.S. retail price of electricity to the residential sector is projected to average 12.7 cents per kilowatt-hour, a 0.7% increase from 2015

It may be seen that despite lowering price trend of primary fuel electricity price has steadily increased .This is due to adopting lesser emission technologies.

It should not be different for countries like Bangladesh which has plan for adopting super critical and ultra-super critical technologies. Power generation cost is not only dependent on cost of primary fuel.

What Bangladesh Do?

Bangladesh must work on sustainable energy security to keep the pace of economic development going.

Primary Fuel arrangement is a major challenge as the proven reserve of own gas resource is fast depleting.

It requires huge investment even to explore and explore untapped resources. Bangladesh is implementing various mega projects for imported fuel based power generation. It is the best time to negotiate and conclude long term coal and LNG import contracts.

Bangladesh must also expand its strategic liquid fuel reserve enough for six months. It should also expand capacity of its lone refinery and plan for setting up a second refinery in the Khulna Region. Price of liquid fuel and power tariff may also be revised.

Bangladesh needs aggressive energy diplomacy and very professional negotiation skills now for negotiating and concluding fuel supply contracts.

There must be an ideal mix of spot price based and long term fixed price contracts. Private sector must be involved as government alone will struggle to conclude contracts.

Saleque Sufi is an energy expert.

 

 

 

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