https://www.theweek.co.uk/oil-price/95286/what-is-the-price-of-oil-and-which-way-will-it-go
What is the price of oil and how will Venezuelan unrest affect it?
Jan 28, 2019
Market fluctuations over the past four years have huge economic and political implications
Jean-Sebastien Evrard/AFP/Getty Images
The price of oil has been on a roller-coaster ride over the past few years, plummeting from its 2014 peak before making a steady recovery only to be hit by further geopolitical turmoil – all with huge consequences for the global economy and especially oil-producing states.
SEE RELATED
How Saudi Arabia is trying to become less reliant on oil
US to be crowned oil king of the world
Could Saudi Arabia weaponise oil again?
Brent Crude, the major benchmark price for oil purchases worldwide, increased by more than 20% in the first half of 2018, before hitting a four-year high of $86.07 a barrel in early October.
But since then the price of crude has crashed, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.
Prices fell to a year-low of just over $54 a barrel in December, a drop of 35% from October, but stabilised somewhat after the Organization of the Petroleum Exporting Countries (Opec) and Russia agreed to slash production by 1.2 million barrels a day.
Volatility returned to the market last week as political unrest in Venezuela threatened to further disrupt supply from one of the world’s major oil producers.
President Nicolas Maduro cut ties with Washington after Donald Trump announced he would recognise opposition leader Juan Guaido as interim president.
The US is Venezuela’s biggest and most important oil customer, accounting for 39% of deliveries last year, according to ClipperData. As the fourth-biggest source of foreign oil, Venezuela is also crucial to American refineries, which take in hundreds of thousands of barrels each day.
With the White House indicating it could possibly impose oil sanctions on the country, “that tight oil relationship is coming under enormous strain”, says CNN, all of which affects crude prices.
RBC Capital Markets predicted that US sanctions could nearly double projected output shortfalls from Venezuela to between 300,000 and 500,000 barrels a day.
This caused crude prices to hit $61.70 over the past week “but concerns over surging US fuel stocks and global economic woes weighed on sentiment”, says CNBC. Meanwhile, “the ongoing US-China trade dispute and broader gloom over world economic growth put a check on prices”, it said.
Brent Crude is currently down slightly at $60.55 a barrel at midday on Monday, “reflecting fresh concerns over supply after data late last week showed the US oil-rig count rising for the 10th straight week”, says Market Watch.
Oil field services company Baker Hughes reported on Friday that the number of active US rigs rose by ten to 862 in a week. It came a day after the US Energy Information Administration reported that domestic crude supplies have climbed by eight million barrels to a two-month high.
However, investor eyes remain firmly fixed on events in Venezuela and whether Trump takes the drastic step of imposing new sanctions – a move that could crash not only the country’s fragile economy but also impact global oil markets.
Why did the price of oil plummet in 2014?
With prices hovering around $56 mark, it is a far cry from the heady days of June 2014 when Brent Crude hit $115 a barrel.
What followed became known as the Great Oil Bust of 2014, when prices dropped roughly 40% between June and December of that year, and continued to fall until they hit a low of just $36.05 a barrel in early 2015.
Robert J Samuelson writing in the Washington Post said the price collapse “mainly reflects too much supply chasing too little demand”.
Surging US shale oil production, which had increased by 3.5 million barrels a day from 2008, coincided with lower-than-expected global demand and the lifting of US economic sanctions against Iran by Barack Obama – all contributing to pushing down prices.
This is because even small shifts in the supply-demand balance can result in significant price changes.
“Modest surpluses and shortages can trigger dizzying price swings, because consumers’ needs - in the short run - are rigid,” said Samuelson, while “shortages cause a scramble for supply; surpluses produce price plunges to clear the market”.
What are the consequences of oil price fluctuations?
Declines in oil prices signal a massive transfer of wealth from producers to consumers, estimated at about $1.5trn annually by economist Edward Yardeni.
Writing in December 2014, Samuelson said that “although the full implications are hazy - in part because it’s unclear where prices will settle - likely effects include a boost to the sluggish global economic recovery and political strains for some major exporters, including Nigeria, Venezuela, Russia and Iran”.
Nowhere has the political impact of plummeting oil prices been more acute than in Venezuela.
According to Reuters, the country’s output has halved since the early 2000s to 1.5 million barrels per day, hit by a lack of investment in the oil industry.
Combined with falling oil prices, the socialist government of Nicolas Maduro has been forced to dramatically cut public spending, leading to huge shortages in the likes of food and medicine. This in turn has provoked mass public unrest and brought the country to the brink of civil war.
To a lesser extent, Nigeria and Russia have experienced a similar level of public upheaval in recent years. In these countries, an over-reliance on oil revenue has hit their economies hard.
Continued high oil prices could also constitute a “major risk” to India’s burgeoning economy, says Guarav Sharma in Forbes.
“With its booming manufacturing industries, supplemented by services and technology industries, the Indian economy swelled on the back of cheap oil prices with Brent posting sub-$30 per barrel levels at one point during the recent oil price slump of 2015-16,” he writes, “but that was then for a country reliant on imports for 82% of its crude oil needs.”
Fitch-owned research outfit India Ratings opined that the Indian economy has the resilience to withstand and absorb the oil price shocks for a few months, but if oil prices remain high beyond two to three months, it will “adversely impact all the major macroeconomic variables such as current account, currency, inflation, interest rate, fiscal deficit, GDP growth and conduct of monetary policy”.
On a wider global level there are also concerns the price correction of the past six months could spark the next economic downturn.
CNBC says “this should not come as a surprise for any investor who is a student of market history” given the last five US recessions were also preceded by a rise in oil prices.
What does the immediate future hold?
Most analysts believe the possibility of immediate US sanctions on Venezuelan oil exports are unlikely.
Jim Ritterbusch, president of Ritterbusch and Associates, said in a note published by CNBC: “We view a blockade on Venezuelan imports as low probability and a last resort measure that is likely weeks if not months away should it materialize.”
Barclays last week cut its 2019 average Brent forecast to $70 a barrel, from $72 previously, saying record US production would likely offset any short-term disruptions to Venezuelan supply due to possible sanctions.
Oil producers across North America may be looking at dialling back their investment plans amid plummeting oil prices, but BP’s Middle East chief appeared unfazed.
“You don’t plan on today’s oil prices - you plan on a range,” Michael Townshend told CNBC in November. “We see a sensible range would be in that $50 to $70 range. And that's what we plan on.”
Industry sources say Saudi Arabia “wants oil to stay between $70 and $80 a barrel for now”, says CNBC. Despite shelving plans to float Saudi-state oil giant Aramco, the Kingdom “still wants to keep oil prices as high as possible without offending Washington” as it needs cash to finance a series of economic development projects, says the broadcaster.
Crown Prince Mohammed bin Salman will today unveil plans to raise 1.6trn riyals ($425bn) of investment in railways, airports and industrial projects by 2030 as the country looks to become less reliant on oil revenue.
What about in the long term?
News that India is set to overtake China as the biggest source of growth for oil demand by 2024, could have significant implications for forecast models.
Research by consultancy group Wood Mackenzie suggests India’s oil demand is set to increase by 3.5 billion barrels a day between 2017 and 2035, which will account for a third of global oil demand growth.
CNBC says a key factor in this will be the country’s expanding middle-class as well as growth needed for mobility.
On the other hand, China - currently the second-largest oil consumer in the world - may soon need less oil. In 2017, it overtook the US as the biggest importer of crude oil, but it is set to see a decline in oil demand growth from 2024 to 2035, according to Sushant Gupta, research director at Wood Mackenzie.
Gupta told CNBC that is due to two trends: alternative energy sources such as electricity and natural gas are displacing the need for gasoline and diesel, while a more efficient freight system and truck fleet will also result in sluggish road diesel demand.