Unpredictable fluctuations in global oil market

Wednesday, 2018-09-26 12:26:18
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The trade war between China and the US has created new challenges for the world's oil market. (Reuters)
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NDO – The world crude oil prices climbed to a four-year high after the Organisation of the Petroleum Exporting Countries (OPEC) and other major oil producers refused to increase crude output to cool down the oil market. As the United States-China trade war threatens to adversely affect the global economy and the oil market, and the supply is projected to become scarcer, the “black gold” market continues to be faced with multiple challenges.

Brent Crude oil prices hit approximately US$81 per barrel, its highest since November 2014. West Texas Intermediate (WTI) crude also rose by US$1.52 to US$72.3 per barrel, reaching a two-month high. The oil prices spiked after a recent meeting between OPEC members and oil-producing partners, including Russia, in the Algerian capital of Algiers, saw no official proposals on increasing oil production at the call of US President Donald Trump. Following a long period of low oil prices, oil exporters inside and outside OPEC struggled to find ways to raise prices. The 2016 Algiers Accord signed between 25 countries, both inside and outside OPEC, on cutting production by 1.8 million barrels a day is among those solutions, but the agreement is due to expire later this year. Therefore, countries need to thoroughly discuss expanding cooperation to deal with the growing challenges. Oil producers stated that a price of US$80 per barrel is appropriate for both manufacturers and consumers, ensuring a well-balanced global market.

OPEC has raised its forecast for global oil production, while predicting that the demand for oil will grow in the long term, especially in developing countries. The supplies of hydrocarbons around the globe, mainly oil and liquefied gas, are expected to rise from the current level of 98.4 million barrels per day to 104.5 million barrels a day by 2023, and 111.9 million barrels per day by 2040.

These figures are higher than the forecasts in 2017, which is attributed to the increase in oil production in non-OPEC countries, led by the US. Total oil production in non-OPEC nations is predicted to increase by 8.6 million barrels a day to reach 66.1 million barrels per day by 2023 due to the rising global demand. However, the demand for oil also continues to grow despite the expanded market shares of electric cars and countries strengthening their policies to encourage the use of renewable energy sources. This is because in developing countries which have a rapid rate of population growth and economic development, oil remains one of the key determinants of growth.

Oil producers are reluctant to increase crude output aimed at keeping oil prices stable. Nonetheless, the International Energy Agency (IEA) said that after reaching a record production of 100 million barrels per day in August, the global “black gold” market may fall into a state of insufficient supply and there could be a sharp hike in fuel prices as Iran and Venezuela reduce their oil export volumes. According to the IEA, the world’s oil market is entering a decisive period as “everything becomes more competitive.” The new US sanctions against Iran’s oil industry, which will come into effect this November, are predicted to impact the market. The August oil production of Iran, an OPEC nation, fell to its lowest level since July 20, 2016, after many customers, including the top two oil importers, China and India, had to stop importing oil from Islamic countries for fear of US sanctions. Iran’s oil output has dropped by 500,000 barrels a day since May. Meanwhile, the trade war between China and the US has also created new challenges for the oil market. In order to maintain its economic growth, which has already been affected by trade tensions with the US, China needs to find a cheap supply of oil. All of these factors will undermine the stability of oil prices.

The US surpassing Russia and Saudi Arabia to become the world’s largest crude producer last August could lead to calculations aiming to curb US influence on this market. Oil producers, both inside and outside OPEC, have rejected US President Trump’s call for increased oil production, which is expected to put pressure on the “black gold” market in the US. Although Saudi Arabia has promised to offset the declining output in Venezuela and Iran, the US ally has been “shaking hands” with Russia to refuse the US side’s proposals on increased oil production. Such calculations to protect the interests of the oil giants are therefore causing the “black gold” market to proceed in an unpredictable fashion.