Oil can be considered as the most political commodity of the modern world, because today this black material is one of the main aspects of the world political relations. Therefore, since politics always shadowed this market, the oil market can be considered the most unpredictable market in the world, because it is more affected by external factors than its internal factors. The same external factors cause the price of black gold to increase to over $130 per barrel and go down below $30 per barrel within a short time. So the future of this market has always been in a state of ambiguity.
However, given the world’s economic and political conditions and the factors influencing this market, we can get a general image of the future of this market. This image may change under the influence of external factors such as strategic tensions. On the other hand, the main players in the market also influence the oil price charts by their decisions. The same effect and attention to it in 2016 provided the ground for a deal to reduce production among members of OPEC and Russia.
Under this agreement, OPEC members limited their production to 1.2 million barrels, and Russia and its other confederates agreed to cut their daily production by 600,000 barrels. The decision was finalized with the aim of controlling supply in the oil market in the final days of 2016, and its implementation was operated by the beginning of 2017. Although the agreement to reduce production in the late 2016 could shake oil prices to over $55 per barrel, but at the same time, in early 2017, this agreement could not have triggered serious shocks in the oil market, and in the first half of 2017, oil prices dropped below $50 per barrel. This was while most members of OPEC and Russia adhered to this agreement. Oil, which was at $55 per barrel in the beginning of 2017, was descending until June.
The lowest oil price in 2017 was in June, which recorded a figure below $45 per barrel. Despite the oil price fluctuations in the first half of last year, OPEC and Russia, as the main oil producers in the market, were trying to prove that they are seeking to regain their position in the oil market, in an effort on the meeting of OPEC in summer, extend the agreement of reducing production for another 9 months. The 9 months extension was agreed with the hope that the concurrency of implementation with the cold season in the northern hemisphere could greatly balance the oil market.
The brilliant summer of the oil market
By the extension of the agreement along with rising world energy demand, this strategy helped to reduce production and push prices to reach $57 per barrel by the end of the summer of 2017. The decision made the summer of 2017 the best season for oil prices in the last 13 years. In the summer quarter of the year, Brent crude oil prices grew up 20%, and rose from $48 to $57.5 per barrel.
This growth continued. The price of oil has risen since late summer. One of the most important factors in this growth is the announcement of the commitment of OPEC members to the agreement to reduce production. Along with that, geopolitical tensions in the Middle East at that time helped to increase prices in the oil market. The holding of a referendum on independence in the Kurdistan region of Iraq and the vote for independence, followed by tensions in the relations between Kurdistan and the central government, led to more concerns over the supply of oil. Iraqi Kurdistan exports oil produced in Kirkuk through the port of Ceyhan in Turkey. Following the announcement of the independence of the Iraqi Kurdistan, Turkey closed the route. Although this tension did not last for more than a few weeks, and the Kurdish region retreated, but it impacted on the oil market and raised prices to nearly $60 per barrel, and the growth continued until the end of 2017.
By considering the continued growth of prices and rising oil prices in the last days of the year, the price increase was 30% higher than the lowest in 2017. The rise in prices in late 2017 could break the 2.5-year record. In sum, Brent oil prices rose by 17 percent in 2017. American light oil also experienced a 12 percent price increase during 2017. Improving the oil price increase with a nine-month extension of reduction in production agreement encouraged OPEC and non-OPEC manufacturers to extend the deal for the next 9 months until the end of 2018. Of course, there were problems with the extension of the agreement at OPEC’s meeting on November 2017. For example, Libya and Nigeria, which were exempted from the initial agreement because of their reduced production of oil, were able to increase their production to some extent during the past year, which would increase supply and reduce the effects of the agreement. So the members decided to join the two countries.
The oil market balance in 2018
Extending the deal by 2018, the oil market was already preparing for higher prices, so that for the first time since January 2014, both of the world’s top indexes were traded at over $60 on the first day of the new year. Brent oil with a rise of 0.5 percent stood at $67.2 per barrel on the first working day of the year. In the first step in 2018, US light oil had a growth of 0.4 percent and traded at $60.66 per barrel. These prices grandstand in the oil market, as the average price in the last three years always was below $60 per barrel. Black gold was traded between 2015 and 2017 at an average price of 52, 44 and 54 dollars, respectively. Now, however, the forecasts are more hopeful than the past, and they outline a clear horizon for black gold.
The oil market situation is such that activists in the market all claim that OPEC has succeeded in controlling supply and, consequently, boosting prices in this market. Most of experts in this field expect the price of oil in this year to be above $60 per barrel in average. In this condition, if demand for crude oil increases by 1.6 million barrels per day in 2018, we can hope that this market will be balanced this year. According to the current situation in the second quarter of this year, inventories of oil will decrease. During this period, oil prices will continue to rise. In 2018, while outlook of the oil market is prosperous, strong economic growth in the world will boost energy demand. At the top of all countries, of course, China has recorded the highest demand. Also, the Middle East disputes between the two main powers of OPEC, Iran and Saudi Arabia, will also help boost prices in the black gold market. On the other hand, the one-year implementation of the agreement to reduce production has led to a decline in oil reserves in the world, leading to an increase in oil prices.
How long does the agreement last?
But these factors do not alone in the oil market. Increasing prices in the world will make shell oil more prevalent to this market. According to the US Department of Energy, the country’s oil production will reach 10 million barrels per day this year. The increase in US oil production, not only largely makes the country independent from import of oil, but also potentially triggers a warning that the United States can become an oil exporter in the medium term. But only shell oil and US oil policies will not threaten oil prices in 2018. If prices continue to rise in the global markets by mid-year, then it will be anticipated that the OPEC and non-OPEC countries which have agreed to cut production to withdraw from the deal. Although OPEC has stated that the strategy of the organization is more focused on continuity rather than on withdrawal, the favorable growth of prices will be the alarm of the early withdrawal of Russia from this agreement. Of course, in this case, Russia will not be alone, and OPEC countries will end the deal before the time runs out.
In the meantime, early withdrawal from the deal alone can lead to deterioration in the balance of the oil market. However, total factors indicate that 2018 could be favorable for the oil market. Although even the most optimistic people are not hoping to return prices to over $100 in the short time, the forecast for oil price is not expected to hit by any of the experts in this field, and in the worst case scenario, prices will be expected to remain on the $60 level. Nevertheless, surprise is one of the main components of the oil world and it will remain.