- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
Recent oil price movements have been sending mixed signals pertaining to future market conditions. Having dropped from the 2014’s annual average of above US$100 to as low as $26.21 in 2016, the increasingly heightened uncertainties in recent months arising from potential loss of Iran’s oil market share with the U.S. withdrawal from the Iran nuclear deal, Venezuela’s worsening economic crisis, the lack of global investment and ambiguity over OPEC’s future output cut deal have sent the future of the oil market into risky, unknown territory.
Market-specific endogenous supply shocks, exogenous supply shocks that derive from geopolitical developments, as well as speculative demand shocks are the major reasons why it is difficult to understand price movements.
While unexpected market shifts can give upward price signals, disruptions from unexpected geopolitical developments could also trigger downward trends. The disconnection between different price signals due to endogenous and exogenous reasons are, therefore, sending ambiguous signals from which governments and companies try to assess the best available position to stay afloat. In such an environment, it is imperative to take into account a myriad of reasons when predicting future trends.
Although the cumulative price increase of $11 at the beginning of 2015 was seen as a recovery, it subsequently proved to be temporary. With speculative demand shocks, together with the collapse of shale drilling activity in the U.S., an unprecedented price increase ensued. However, the following couple of months showed a completely different picture. With the ongoing economic slowdown in the Eurozone and China, disruptions in shale production, the sharp production cuts in Libya and curtailment in Iranian output, an excessive drop in oil prices resulted falling from $65 to $31 at the end of 2015.
Due to high stock levels and supply elasticity, there was a popular belief that oil prices could stay low for the many years ahead. However, the recent upward price movements have shaken the view of ‘lower forever’ - a view coined by oil giant Shell to describe future oil prices.
At the turn of 2016, the demand-supply balance narrowed down to below 1 million barrels per day, largely due to the production cuts of non-OPEC members and with the contraction in U.S. shale production. The unexpected production cuts in Libya, Venezuela, and Nigeria accounted for over half a million barrels per day.
With the aim of rebalancing the oil market, both OPEC and non-OPEC members came together and became known as OPEC+, to agree to cut 1.8 million barrels of daily oil production. Prior to the deal, oil prices were about to fall below $40. The output cut agreement made during OPEC’s 171st Ministerial
Conference in January 2017 was interpreted as a policy shift from the two-year oil price collapse. The emergence of the OPEC+ agreement has therefore been a turning point for oil price recovery.
Between April and May 2018, Brent oil price jumped from $66 to above $78. West Texas Instrument (WTI) also has also seen corresponding increases over the same time period. However, this oil price increase within a month or so has more to do with a shift in future expectations than it has with supply-demand fundamentals. In an environment of declining oil stocks along with growing risks of geopolitical uncertainties, oil prices are pressured upwards based on greater demand speculation.
Despite OPEC and non-OPEC producers compliance to the output cut agreement, overall oil prices have increased. Many oil strategists now believe the extended oil output cut agreement may well not last until its expiry in June 2018. Nonetheless, Russia’s reliability and other OPEC members’ determination to stay committed to the agreement could dispel the fragility of the coalition. It is notable that this agreement mostly benefits Saudi Arabia and Russia, the biggest oil producers. Nonetheless, other member states may not like this since their expectations from the coalition is financially motivated, and given their production volumes are cut as part of the agreement, their expected financial returns are unlikely to materialize with the current price levels.
There is still no agreement on whether it is persistent supply gluts or faltering increases in global demand from emerging economies with economic stagnation that have caused global oil market turmoil since the beginning of June 2014. The disconnections between external and domestic supply shocks, along with demand feed fluctuations, have resulted in unexpected price levels, which have sent mixed messages to the market. Nonetheless, the further deterioration in the global economy, the return of conflict in Libya and Nigeria, the unexpected, strong friction between the U.S. and Iran over the nuclear deal, and aggressive shale production increases could drag oil prices down to historic lows.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.