Decoding uncertainty in the world oil market – analysis
Setting the price of crude oil has become a complex task with an unprecedented number of slippery variables, despite the fact that its suitability to operate the global economic engine is increasingly questioned.
The meeting of the Organization of the Petroleum Exporting Countries (OPEC) + cartel held recently in Vienna witnessed a dramatic repercussion between Saudi Arabia and its former ally, Russia, on the reduction of production to offset the huge global demand. This turned into an unprecedented oil war for gaining market share between two of the world’s largest oil producers. Riyadh has promised to flatten the pump 12.3 mb / d, and has offered deep discounts to its buyers, while Moscow has said it will open its taps unrestricted by the current OPEC pact, thereby flooding a market that is already oversupplied. Earlier this week, oil prices experienced the biggest drop since the 1991 Gulf War.
Moscow’s reluctance to join the Saudi-led OPEC proposal for deeper cuts is apparently to shake the shale industry, which has catapulted the United States (US) as the world’s largest oil producer . The recent sanctions against Rosneft Trading and the subsequent arrest of NordStream 2, an ambitious pipeline project that would have connected the Siberian oil fields with Germany, are other geopolitical measures inflicted by the United States that have irritated Moscow.
All eyes are on whether the belligerent parts of the oil cartel return to the negotiating table. However, oil prices in the medium term will be significantly determined by four factors, some of which are beyond the influence of the difficult Opec + alliance.
The biggest buffer in world demand is the new coronavirus that has devastated supply lines, tourism and travel, and has quarantined millions. Radiating from its epicenter in Wuhan, China, it has infected South Korea, Italy, the United States and Iran, among others. World demand for oil will drop for the first time since 2009, and the International Energy Agency will revise down its demand estimates by one mb / d, given a combination of a major shock to demand and huge oversupply.
Although these are the first days to predict the trajectory of Covid-19 and its duration, with the peak of the virus in some parts of the world and decreasing in others, anyway, this will have an important bombing effect on the global economy at least for this year. .
Russia’s commitment to hollow the US shale industry. UU. It’s just that: a bet that can be a boomerang. The US shale landscape includes a heterogeneous mix of equilibrium producers and those with more solid balances. There are producers that can withstand $ 30 per barrel, but if prices continue at current levels for an appreciable period, the closure of platforms, bankruptcies, job losses and capital flight would significantly damage one of the most changing products of the fortune of U.S. .
However, the US shale industry obituary. UU. It has been written before, following the collapse of the oil price in 2014. But the industry is now in a better space to weather an oil war. And as in 2014, it can end up consolidating the largest companies and eliminating the weakest ones, which increases production efficiency.
The future of shale also depends on the outcome of the US elections: both Bernie Sanders and Joe Biden have talked about hydraulic fracking bans or stricter regulations around it. Donald Trump, on the other hand, plans to double oil production in the Permian basin. The “energy independence” of the USA. UU. It has been one of the main changes in recent times to set oil prices and has triggered the reshaping of geopolitics. The result of the oil war against shale and future political decisions will determine the energy dominance of the United States.
In addition, for a medium-term evaluation of the global energy sector, the general impact on renewable energy should be taken into account given the current scenario of falling oil prices. The narratives of climate crises that have come to occupy the political center of advanced economies will only gain traction. This is most evident by large companies, such as the Rockefeller nonprofit organizations, which have traditionally made their fortune through the oil and gas sector, now trying to distance themselves from their association.
Another factor will be the dynamics of the trade war between the United States and China, which has been developing for almost two years. The two largest economies in the world have been involved in a bitter trade battle that has imposed tariffs on billions of dollars. Crude oil prices in the medium term will also be affected by the amount of global demand unrelated to this trade war.
Finally, the repercussions in the region following the assassination of the Iranian commander Qassem Soleimani have not yet been fully realized. The Islamic State is still present in Iraq, while the United States is dismantling its aid scaffolding to the war-torn country that is destined to avoid the dreaded terrorist group.
The calm in retaliation by Tehran can also come from the impending US and Iranian elections. Major demand centers, such as India, have turned to Iraq to quench their thirst for fuel following Iran’s sanctions. Any interruption in the pipelines of southern Iraq could throw the dynamics of oil prices to an even more unpredictable territory.
Crude prices will be determined by global factors, which will limit the power of Opec + even if the alliance overcomes the current existential crisis.
Shreerupa Mitra is the executive director of The Energy Forum.
The opinions expressed are personal.