Oil: A Slippery Slope?
A subject being hotly discussed and debated right now amidst sanctions, OPEC, oil prices, global trade, and so much more.
Oil prices have been expected to be high and mighty right about now. With American sanctions against Iran taking effect earlier this month, exports from Iran, the world’s fourth-largest producer of crude oil last year, were expected to shrink to close to zero. Anticipating this, oil price went above $86 in early October and were even expected to rise more.
Rather than continually rising, oil entered a bear market last Thursday the 8th with the price of oil falling. By November 13th the American oil benchmark had dropped for 12 straight trading sessions. That was the longest consecutive decline in more than three decades, in which there was a 7.1% decline in price.
Why have these sudden and surprising events happened?
The sharp decline may come as a shock, but the reasons are mainly standard. Supply is rising and demand is falling, in October the IMF lowered its forecast for global economic growth, and there is an outsize effect in emerging markets on their demand for dollar-denominated oil because it becomes more expensive in weakening local currencies. As well, the oil market’s recent volatility is composed of some new factors, including the limits of conventional producers and the impact of the US president, Donald Trump.
Now, The Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, is looking to be the provider of stability. Prices should be high enough for its members’ budgets and low enough to support global demand, but that is not the case. There are now three dominant oil producers: America, Saudi Arabia and Russia, only one of which is an OPEC member. As America’s industry has boomed, Saudi Arabia has turned to Russia to help coordinate production.
In recent news, on November 11th, Saudi Arabia’s oil minister Khalid al-Falih said the kingdom would lower output by 500,000 barrels a day in December but Russia’s oil minister doubted that there would indeed be oversupply. This news may anger President Trump who urged on Monday November 12th, that OPEC should not cut supply.
Now, America has stepped up to the plate and created the largest destabilizing effect. This year it became the world’s top producer of crude. Its shale companies are pumping out oil at an increasing rate. For example, output in August was 23% above the level 12 months earlier. On top of that come Mr. Trump’s policies, which are helping to shove oil markets this way and that way.
After the announcements of sanctions on Iran in May, OPEC and its allies agreed to increase output as seen in the production from Saudi Arabia and Russia that climbed to record highs. Then, on November 5th, America announced that it would grant 180-day waivers to China, India and six other countries to continue to import from Iran. These are countries that together account for more than 75% of Iranian exports, according to Sanford C. Bernstein, a research firm.
To go along with the decreasing demand for oil are the trade policies of President Donald Trump. Although there is IMF’s lower forecast for growth which is partially due to a slowdown in emerging markets, there is also ongoing tensions for America and its trading partners. Mr. Trump’s trade war with China is particularly important for oil markets, as China accounted for about 40% of the growth in demand for oil last year.
As oil prices fall, there is reason to think they could spike again soon. More production cuts may come next month, after OPEC and its partners meet in Vienna on December 6th. With the uncertainty in Iran and disruption in Venezuela, along with countries such as Libya, Nigeria or Iraq could squeeze global supply. Taken together, these countries account for more global supply of oil than even Saudi Arabia.
It is quite possible that there is another scenario in this story. President Trump could very much reverse his course. Striking a trade deal with China, for instance, or tightening restrictions on Iran again. If you are on Twitter, then you know he can simply write a tweet. On November 12th Mr. Trump went to Twitter to call on OPEC to refrain from cutting production.
What happened? The oil price fell.
It is important to take a look outside of all this talk of oils prices, markets, regulations and sanctions, and take a look at us, the consumer. The ever so swift drop in oil prices are reason enough for motorists to cheer. In America the good news is that pump prices have dropped 20 cents in the past six weeks, from $2.88 per gallon for regular gas to $2.68, according to AAA.
That saving is giving some padding to consumer pocketbooks as the holiday season approaches. Dollars that would have gone to oil and gas companies will instead be spent elsewhere by individuals and families. There may very well be signals telling us of the potential for negative outcomes in the global economy, but here at home we should take joy in having more money for our friends and families during the approaching holiday season.