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Why Oil Prices Go Down

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leconomiste.com/PrtSc

NEW YORK – November 21, 2018

It’s a real paradox: While the world has witnessed a wave of protests against the increase in gas prices, the price of a barrel has been falling. On Tuesday, the Brent brand was trading for $67—a 23% decline from early October.

After the American sanctions against Iran were announced in March, it seemed that nothing could stop the price of oil, which has repeatedly moved above $80. Traders believed that the loss of more than a million Iranian barrels would exacerbate the already tense situation in the oil market and push prices up to $90 or even $100.

In fact, the exact opposite happened. Demand remains high, but all oil-producing countries have increased production at the same time, flooding the market with excess oil.

Agence France Presse analyst at WTRG James Williams believes that there is too much oil in the world market to maintain prices at the same level.

“Those who believed that the price of a barrel would rise up to $95, including us, can only capitulate,” recognized analysts at Merrill Lynch.

However, the global demand for crude oil remains very high. Thus, in September, world consumption for the first time exceeded 100 million barrels per day. This demand is primarily associated with China, which needs more hydrocarbons for transport, petrochemicals and aviation. Despite the risks of a trade war with the US, Chinese oil demand will continue to grow in the coming years, according to the International Energy Agency.

Thus, everything depends on the bizarre geopolitical game of the three leaders of the world oil market. The United States, Saudi Arabia and Russia simultaneously increased production, which allowed them to take advantage of high prices, but at the same time threw the market off balance.

In early summer, President Trump, frustrated by too high prices, called on the Organization of the Petroleum Exporting Countries (Saudi Arabia is its actual leader) to increase production. Riyadh convinced OPEC and Russian allies to comply. It is worth noting that meanwhile, conflicting signals were emanating from the White House. First, it imposed a strict embargo on Iran, which led to a summer price increase. Then it criticized the increase and demanded for lower gas prices in the US.

It sounds paradoxical, but the heinous murder of Saudi journalist Jamal Khashoggi October 2 at the Embassy in Istanbul has accelerated things. “Actually, the Saudis have been slow to increase production, which Americans want, but the fact is that Khashoggi gave them no choice: To gain the support of Trump, they had to open the valve,” said one knowledgeable source. Russia, in its turn, was also pleased with the idea of increasing production during peak prices and did not stand aside.

Anyway, at the same time, the American manufacturer of shale oil gained traction. No political calls were needed here: Prices are running the show. As a result, American production began to grow at an unprecedented pace. According to the Petromatrix analyst Olivier Jacob, by the end of the year, real production in the US is likely to bypass the volume of Saudi Arabia's capabilities.

The picture of the overall rise in oil production is superimposed by a correction of the US strategy against Iran. The Trump administration has promised that the sanctions will be “the most severe in history,” but at the last moment agreed to make exceptions for the eight largest importers of Iranian oil, including China and India.

These steps were not well received in Saudi Arabia, where they saw the emergence of America’s weakness towards their main rival in the region. To stop the further decline in prices, Riyadh has already announced a reduction in production by 500,000 barrels per day. At the upcoming OPEC summit, which will be held in Vienna in early December, the Kingdom expects to convince partners of the need to significantly reduce production. If successful, prices could go up quickly.

This issue is of great importance for Saudi crown Prince Mohammed bin Salman: At a price of $67 per barrel, the country's budget is in the “red zone,” which does not provide enough funds to continue the bloody war in Yemen and to finance the large-scale reform plan “Vision 2030,” the credibility of which has already been undermined by the Jamal Khashoggi case.

All this means a strong uncertainty in the markets and pushes observers to be careful. “A serious decline in production from major producers would have a negative impact on the markets and further increased the tension on them,” said IEA Director Fatih Birol on Monday, urging producers to “demonstrate prudence.”

A few days before, the IEA issued a warning of another kind: If oil companies do not resume investment, the planet may face a shortage of oil by 2025. Unless, of course, American production once again does not exceed forecasts and will not compensate for the inevitable depletion of existing fields.

Author: USA Really