Actions for price stabilization?

The oil price of more than $60, was certainly not only helped by the approaching winter but also by the relative decline of the Dollar value against the Euro, thus giving a timid stimulus to the growth of the global economy. It was in fact driven by fear of what is going on in the Middle East, rather than because of all those growing OPEC’s inventory reports. So, it is those persistent tensions in Iraq, those of Saudi Arabia’s internal turmoil’s and those to do with the U.S. president’s statement vis-à-vis Iran’s agreement together with those reassuring statements of compliance with the Vienna Agreement by the two major producers Russia and Saudi Arabia, and finally the planned sale of up to 5% of ARAMCO Saudi Arabia’s state oil producer. On November 30th, 2017 OPEC Meeting in Vienna would certainly have been looking critically at the current rise in oil prices together with ways as to how maintain and eventually raise it further. In any case, the oil price seem to be determined by eight number of influencing factors to be wary of in the medium and long term in order to avoid surprises especially for the countries with rentier economies.

In accordance with most analysts’ forecasts, the OPEC and several non-cartel countries agreed to extend the current production reduction agreement for a period of nine months, until the end of the 2018.

However, and in accordance with Russia’s requirements, the cartel has suggested that it could break the agreement sooner than expected in case of the market overheating.

The determinants of the oil price

First, the central element in determining the price of the Oil is the growth of the global economy, particularly China’s, including its energy structure during the 2020 through 2030.

Secondly, on the supply side, we are witnessing a faster than expected increase in the production of (unconventional) oil from the USA that is disrupting the entire global energetic map. During the first half of 2017, crude production increased significantly and would exceed overall 9.5 million barrels per day. 

Thirdly, the OPEC-level rivalries, some of which do not respect quotas. Saudi Arabia is the only producing country in the world that is currently able to weigh on the global supply, and therefore on prices, depending on some agreement between the USA, (the latter not being affected by the) The Agreements (OPEC/non-OPEC), and Saudi Arabia to determine the floor price.

4th, all this is a result of Russia’s measured support for a price regulation agreement. Recently, Russia has increased its production, and opened new deposits in Siberia or in the Arctic, demonstrating an aggressive strategy.

5th, the return to the market of Libya that can easily add up to 2 million barrels/day, and of Iraq with 3.7 million barrels/day (world reservoir at a production cost of less than 20% compared to its competitors) that can go to more than 6/7 million barrels/day. Iran after its nuclear agreement with reserves of 160 billion barrels of oil would allow it to easily export between 5/6 million barrels/day apart from having the second traditional gas reserves of more than 34 trillion cubic meters.

6th, the new discoveries, especially offshore, particularly in the eastern Mediterranean (20 trillion cubic meters of gas, partly explaining the tensions in this region) and in Africa, of which Mozambique could be the third reserves holder. New technologies allow the exploitation and reduction of the costs of the marginal deposits of gas and shale oil.

7th, the USA/Europe which currently represents more than 40% of the world’s GDP for a population of less than one billion people are pushing for energy efficiency with a reduction forecast of 30% and the urgency of moving towards an energy transition to fight against global warming because if the Chinese, the Indians and the Africans had the same model of energy consumption as the US and Europe it would take five times the current planet. China according to the Reuters agency of September 2017, has just indicated that it will reduce by 50% its fleet of cars running on diesel and petrol fuel by 2020. The global strategy should be based on efforts to limit the use of fossil fuels, the world moving towards an Energy Mix. The future that is at horizon  2030/2040 would be hydrogen where development research is experiencing a real boom.

8th, the evolution of the Dollar’s and Euro exchange values in which any increase in one or the other, although there is no linear correlation, could lead to a drop in the price of the barrel, as well as the American inventories and often forgotten the Chinese stocks.

OPEC in the face of the Vienna accords

OPEC deal extended through 2018 would mean the deal will run from January through to December, and the exact volumes of the production cuts will be the same as this year. The OPEC/non-OPEC coalition said that they would monitor market conditions and would remain “agile,” ready to respond if the fundamentals were to significantly change. They will nevertheless revisit the agreement at the next official meeting in June 2018.

One assurance is that Libya and Nigeria agreed to cap their production levels, thus preventing any “surprise.”

Meanwhile all smiles were from Vienna on the faces of the US Shale producers who were somehow comforted in their endeavours for more production with an ever-decreasing range of costs.