Energy platform editorial advisor, energy economics expert Dr. Anas Al-Hajji, said that oil prices are affected by commercial oil stocks, as a decrease in stock raises prices, and a high stock lowers them, but there are other factors.
This came during an episode of “Energy humanitiesAl-Hajji presented it on Twitter, under the heading “Reserves, Stockpiles, and Oil Prices,” in which he indicated that the stock is what was produced from crude oil, while the reserves are the quantities that are underground, and have not yet been produced.
He added: “When talking about the change of commercial inventory in general, the well-known general rule is that a decrease in inventory increases prices, and an increase in inventory reduces prices, but by looking at the data, we find that this rule does not always occur, but what happens is the unexpected change.”
And he continued, “In other words, if there are expectations of a decline in stocks, but it contradicts expectations and rises, then oil prices drop clearly, and vice versa, if there are expectations of a rise in stocks and it suddenly decreased, then prices also decrease, but if the real expectations agree, prices do not change.”
What is the relationship between oil prices and reserves?
Dr. Anas Al-Hajji, editor-in-chief of the specialized energy platform, said that there is a relationship between oil prices and reserves, as oil is an unproductive thing, so there are several things that must be considered, first with regard to the United States, which was – historically – the largest oil producer in the world at certain times, Then it lost that position to other countries.
He added: “America returned after the shale revolution, and became the largest oil producer in the world, and the largest gas producer in the world. In general, you trade in the stock markets, as there are great conditions from the Stock and Companies Regulatory Authority, laws and legislation.
Among these legislations, according to Al-Hajji, is that the company cannot announce that it has, for example, 500 million barrels of oil reserves, and then the evaluation must be based on precise conditions, so it can only calculate 200 million barrels, even if it already owns 500 million. .
He continued, “Among these conditions is that if you are in an area where there are reserves, and you want to drill in this area after 10 years, it is forbidden to calculate the oil reserves in this area, and it can only be calculated if drilling actually took place, and its existence was confirmed.”
This explains, according to al-Hajji, the reason for one company buying another company at a price higher than the share price, because everyone knows that this oil already exists, but it cannot legally be added to reserves, and this is related to laws that prevent companies from evaluating their assets except based on the market value. .
And he added, “Historically, this was not the case, but for certain reasons these laws changed 17 or 18 years ago, so that the evaluation is carried out according to market prices, and of course there is a specific equation in which quarterly averages are taken to calculate this equation.”
He explained the importance of this step, that if the prices fell to $20, based on this equation imposed by the stock market regulator, the value of the stock would decrease to reflect the price of $20, and then all the reserves that cannot be produced are valued at the same price, and should be deleted if Reserves were 500 million barrels.
He pointed out that here what can be produced must be evaluated only at the price of $20, “If we assume the production of only 100 million, then the reserves must be reduced and new reserves much lower than before, due to the drop in oil prices, although this is unproduced oil, but The company’s value drops dramatically.”
And vice versa, if oil prices rise to $150 and stay at this price for a long time, the value of companies will rise dramatically for no reason, despite the same reserves, the same number of employees, and the same costs, but the law allows the company to be evaluated according to the new price, and then it affects Prices are in reserves.
The effect of filling the US strategic stockpile
Dr. Anas Al-Hajji believes that filling the US strategic oil reserve will not affect oil prices, as the Biden administration’s recent decision to purchase 3 million barrels of medium sour oil, and put offers to buy another 9 million barrels, caused great confusion in the markets.
He explained that filling the US stockpile, if it left an impact, would be very weak, for several reasons, the first of which is that the quantities that the United States will buy are few, as it has withdrawn during the year 2022 about 211 million barrels from the strategic stockpile, and there is a decision by Congress to sell quantities every year. Some are now to fund inventory management.
Dr. Anas Al-Hajji says: “The problem here is that they do not want to return the stockpile to what it was at the time of George Bush Jr., or at the beginning of the Trump era. Any filling of the stockpile is in the range of 60 to 90 million barrels only, and these are small quantities, and their impact on the market is small, but it becomes Less if we know that they cannot suddenly buy these quantities, and include them in the stock, because the pumping quantity is governed by the presence of 4 places or 4 stations for the strategic stock.
He added that the maximum that can be pumped at each station is about 100,000 barrels per day only, so if there is a technical problem, large quantities cannot be purchased, and they must be bought over a long period of time, and only 100,000 barrels are pumped in each one, that is, they can pump 400 to Only 450,000 barrels per day, and no more than that, assuming that everything goes well.
However, according to Al-Hajji, if there are two stations filled, they cannot pump more than 200,000 barrels per day, and then buying 60 or 90 million means that they need long months, and then the effect is distributed over a long period of time, and the effect of these quantities fades in Oil prices.
He pointed out that China continues to fill its high stockpile significantly, as it uses it in the event of a rise in prices, adding: “We have previously indicated that Saudi Arabia, by its voluntary reduction, sets the floor for oil prices, while China, by withdrawing it from the strategic stockpile, sets the price ceiling.”
Hence, oil prices will be in a certain range, and this range in the second half of this year 2023 will be higher than the current prices, so it is a better situation, but those who count on high prices ranging between 120 and 130 dollars will not achieve their goal, because China will use its stock. strategy to prevent it.
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