It was spurred on by a school assembly speaker from a national environmental group who scared the bejeezus out of us with pictures of rainforests being cut down, acid rain and dead wildlife. The Iran nuclear deal refuted the widespread but naive assumption that geopolitics can drive oil prices in only one direction. Worries about overproduction from the Opec heavyweights continue as they fight to dominate the cartel before Iran returns to the fray, nobody is backing off at the moment it seems. I thought that they were wasting a resource that was about to run out any day. The end of what Longson described as the “biggest sovereign oil derivatives trade in the world” removes a “bearish overhang for oil”. Paul Stevens of Chatham House, a London-based think-tank, says they could pretend the low oil price is in response to slumping global demand, not over-supply.
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Pressure is actually the greatest within the oil cartel. He did ni not foresee deep-sea drilling or fracking or drilling in the arctic or horizontal da drilling.
So, as they watch China twist in the wind, they are acting cautiously on oil prices, aware that a sharp increase in prices would damage confidence and might tip the world into a downturn whose consequences would damage them as much as the West.
There are key differences between 1986 and the oil market today.
Last week Iran’s Oil Minister, Bijan Zanganeh said that holding an emergency OPEC meeting may be “effective” in stabilizing the oil price.
Supply is the most significant factor which has brought the rout in oil prices and it is this part of the equation which traders need to pay more attention.
A key component-perhaps the key component-is a country’s capability, at a minimum, to maintain output, and better yet, to increase output.
Still, the world’s largest oil exporter has US$668 billion in foreign assets, and recently issued bonds worth US$9 billion to plug a looming US$97 billion budget deficit, said to be the largest in its history. In 1986-87, for example, metal prices doubled a year after oil prices fell by half.
“More importantly, Saudi Arabia can not control prices as well”, he said. It shows that the oil producing countries are ready to endure cheaper crude prices for a longer time to guard their market share and cut down the rivals’ oil output. By cutting back, Saudi Arabia would have ceded market share and lost revenue in the long-run while the resulting price support would have spurred U.S. shale output, inflating the surplus, according to Societe Generale SA.
Some analysts, meanwhile, wonder whether Saudi Arabia’s motivation in seeing oil prices stay down is more politics than economics.
But non-OPEC growth, from both shale and conventional producers, could prove more resilient than Saudi Arabia, OPEC and the IEA have assumed, in a replay of the 1980s. “However, given the size, scale and liquidity of the Saudi market, it would not be far-fetched to see the market categorised in the EM indices category”, he thinks.
The 2015 budgets did take account of the near halving in the past year of oil prices which had remained broadly stable at $110 a barrel between 2010 and 2015. Banks approved these loans because these companies hedged the price of oil many years into the future. A steady slide in the value of the rupee against the dollar erodes some of the gains from falling oil prices.
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But those sentiments have changed with the latest unexpected price drop, growing concern about the demand outlook in China and persistent oversupply. “Oil companies will reduce their efforts to develop new oil fields in frontier regions”, he concluded. Considering that oil demand is stagnating, there is no reason to expect that number has increased since then. That marked the start of a price war.
