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What are two disruptive factors caused by excessive oil prices?

20 December 2018 14:20 (UTC+04:00)
What are two disruptive factors caused by excessive oil prices?

By Narmina Mammadova

2019 will be a very complicated year to forecast because of many uncertain elements, which may all have a direct or indirect positive or negative impact on the world’s economic development and oil prices, the Upstream Petroleum Fiscal Analyst at GlobalData Energy, Alessandro Bacci, told Azernews.

Among such elements, he mentioned the pace of development of U.S. shale oil, political infighting and consequent oil-production disruption in Venezuela and Libya, Canada’s limited export oil routes; Iran’s sanctions; the straining of U.S.-Saudi relations, trade tensions between the United States and China, Brexit; and, last but not least, the possibility of being at the end of an economic cycle.

“You put together all these elements and you understand how forecasting oil prices are very difficult. Fund managers are quite bearish right now because for petroleum futures and options they maintain just over two long positions for every short one. Probably, an oil price around $65 might suit decently the needs of both oil-exporting countries and oil-importing countries. However, then, also if you establish that this may be an acceptable price for many of the involved actors on the exporting side and the importing side as well, the real difficulty will be to stay at that level,” he said.

In any case, it seems reasonable that, unless some cataclysmic events occur, Saudi Arabia (which, at least from the end of the 1970s, has always been and ever more so now OPEC’s de facto leader) and Russia (despite some possible protest from Russian oil companies in case of additional cuts) will continue their oil cooperation in the coming months, Bacci added.

The expert went on to say that as for the oil-importing countries, they benefit from a reduction in oil prices.

Instead, it appears that, despite technological improvements occurred in the last years, shale oil production in the United States—apart from some exceptions in certain areas—still requires an oil price at about $55 per barrel in order to obtain an acceptable investment return, Bacci underlined.

“With reference to profitability, the problem is that many of the principal oil-producing countries (for example, Saudi Arabia, Iraq, Kuwait, and Venezuela), want to have high oil prices because oil profits are the only economic pillar on which their economy is almost completely based. So, the more they get, the better is for them at least on a short-term basis. However, excessive oil prices now put in motion two disruptive factors for oil-producing countries: first, on a medium-term basis they reduce oil demand (demand destruction) and, second, on a long-term basis they speed up the process toward renewable energy. For sure, what has changed over the last ten years is the U.S. role in the oil markets. Thanks to the technological improvements in extracting shale oil, the United States has emerged in just a few years as one of the most important oil producers. This phenomenon has consistently changed the landscape for OPEC, which has been forced to develop an alliance with Russia in order to try to maintain the leverage on the oil markets it had had for decades,” he said.

Oil is one of the most important sources of energy for any country's economy. However, not all countries have this precious non-renewable resource, which is called “black gold”. The power of this energy lies in the hands of only a few countries, many of which have witnessed rapid industrialization and modernization, mainly because of their reserves.

Fluctuations in the oil industry can have far-reaching consequences not only for the economy of oil-producing countries, but also for the world economy. Oil production is measured by the number of barrels of crude oil produced each day before the refining process.

As is known, Azerbaijan is among major oil-producing countries.

A barrel of Azeri Light crude oil increased by $ 0.80 to stand at $ 59.20. The price of one barrel of Azeri oil in December 2001 was $ 19.15, and in July 2008 - $ 149.66 per barrel.

As of December 20, 2018 on London ICE (InterContinental Exchange Futures) cost of the Brent crude oil decreased $0.92 to trade at $56.32, while the price of Light crude at the NYMEX (New York Mercantile Exchange) fell $1.05 to stand at $47.12 on world markets.

The main factor affecting the collapse in prices, have become heightened fears of an oversupply of oil. In turn, investors note signs of slowing global growth.

Bidders react negatively to the growth of U.S. oil production and reserves. On the eve of the analytical company Genscape reported an increase in oil reserves for more than a million barrels at the terminal in Cushing, the United States in December 14-17.

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