This is why oil prices are fluctuating wildly

Tue, 13 Nov 2018 18:46 GMT
In October, the international benchmark for oil prices, Brent crude, hit its highest mark in four years as it touched $86 per barrel. It was a long-awaited recovery that energy-dependent countries such as Saudi Arabia and Russia had been looking for.  But...
This is why oil prices are fluctuating wildly

In October, the international benchmark for oil prices, Brent crude, hit its highest mark in four years as it touched $86 per barrel. It was a long-awaited recovery that energy-dependent countries such as Saudi Arabia and Russia had been looking for. 

But then the price began to tumble and by November 9 it had come down to $70. Oil price in the US, measured as the West Texas Intermediate, saw an even more remarkable plunge, falling for 10 straight sessions to $60 per barrel from a high of more than $76 last month.

Here’s what’s happening. 

Iran wasn’t punished hard enough

Ironically, oil traders think the sanctions on Iran that have threatened to cut the supply of life-saving medicines and create economic turmoil there, aren’t harsh enough. 

Oil prices began to firm up after US President Donald Trump announced earlier this year that he would pull out of a landmark nuclear deal and re-impose sanctions on Iran, the third largest producer in the Organisation of Petroleum Exporting Countries (Opec). 

The US, which wants to inflict maximum damage on the Iranian economy, has repeatedly said that it wants to drive down Iranian oil exports to zero. 

But when the sanctions came into effect this month, the Trump administration gave waivers to eight countries including Turkey and Japan, which have been allowed to continue energy imports from Iran

These countries, which also include large economies such as China and India, account for 75 percent of Iranian energy export, according to the Financial Times

The price fell after it became apparent that substantial quantities of Iranian oil will still be reaching the market. 

US pressure is working 

The US pushed Saudi Arabia, the world’s largest oil producer, to ramp up production in anticipation of a reduction in the oil supply in the wake of sanctions on Iran

In recent months, Saudi Arabia, the United Arab Emirates, Russia, and others have jacked up their output but mainly to benefit from higher oil prices

More production has also come to the market from countries like Libya and Nigeria which had, until recently, slashed output due to conflicts and economic difficulties.

Iraq, another major Opec producer, is in talks with the Kurdish Regional Government to export additional oil to the market. 

But now Riyadh insists that there’s excess supply in the market, requiring a cut in production of at least half a million barrels a day. 

Plainly put, an increased supply in the market is leading to lower prices.

Near-high production 

Saudi Arabia, the US, and Russia, the world’s largest oil producers, have been pumping out at record levels. Despite concerns over a glut, all the countries had ramped up production to benefit when the price was high.

Another game changer is shale oil production in the US. 

Advances in technology have allowed American oil companies to tap hydrocarbons from the shale rock formations. Shale oil producers, who are partially blamed for 2014 collapse of oil prices, have helped increase the country’s output to well over 11.3 million barrels per day (bpd). 

But shale drilling is more expensive than pumping oil out of conventional wells in Saudi Arabia or Russia. So whenever the price is high, shale producers tend to increase their output. 

Most of the world’s oil is produced by non-Opec countries such as the US, Russia, Canada, and Brazil. 

But when it comes to exports, Opec countries, particularly those in the Middle East, hold the biggest share because they have spare capacity and can readily bring more crude to the market at lower cost.

Global economic concerns

Demand for oil is correlated with economic activity and there’s plenty to suggest that the global economy is facing headwinds

Emerging markets such as Argentina have been in the news for months due to a currency devaluation triggered by its high foreign debt. 

In India, there are concerns about the exposure of public sector banks to bad loans and China’s economy grew at its slowest rate since 2009 in the third quarter of this year. 

The ongoing trade war between the US and China, in which both countries have imposed taxes on each other’s goods, have further dampened the mood with experts fearing this could encourage protectionist regimes around the world

In Europe, Italy is engaged in a tussle with the European Commission over an expansionary budget plan and Britain is still trying to sort out the impact of Brexit on its businesses. 

How long these factors will continue to suppress the price remains unclear.

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