2016: Upward Trend in Oil Price

The Perspective of the Oil Price in the Fluctuating Market

It is about two years that the oil producer countries in the world have been placed in an inactive position. They do not have the capability to determine the market’s conditions nor find an appropriate solution and just are seeking someone from heaven to change the oil world market and the equation in favor of them.

News ID: 66031

Date: 21 August 2016 - 13:18

The rising of oil price which was something to be proud of, has been decreasing since spring of 2014. Consequently, the point of $140 oil is unattainable for the giant producers and exporters who are observing the price decrease day by day.

In this period of time, most of the oil-rich countries believed that the price of the oil is not going to go below $50, but at the beginning of the year 2016 the range of the price was from $20 to $30, which was record low in the past 13 years. Among the others, some factors are more imperative: Oversupply in worldwide markets, implementation of JCPOA and the return of Iran to the oil trade scene to reach the amount of pre-sanction era, widespread activities of America to extract and produce unconventional oil and a low demand for energy.

The OPEC summit on 4 December to determine the ceiling of production and decrease the oil supply ended unfruitful and provoked the unsettled market and consequently led to further decline in oil prices at the end of 2015 and the beginning of 2016. However, the decision of Saudi Arabia and Russia for holding the Doha meeting and implementation of the oil freeze plan and maintaining the price of their oil brought the hope to the market to give rise to an increasing price at a gentle pace. And now in the fifth month of 2016, we can find little improvement in prices which has reached $40pb.

After the inconclusive meeting of Doha and despite the oil market being fluctuated again, no negative reaction was found and the price did not fall. Evidently, we can say the political decisions and factors of producer and consumer countries affect the global market of the black gold and have made its future unanticipated and ambiguous.

Considering the fact that the economic indices are forwarding at a low tone, we automatically expected the oil market to increase continually in a gentle trend.

Resistance against Rising of the Oil Price

Most of experts believe that returning the prices to $20 is unexpected, since with approaching the price to under $30, the countries whose production cost has been more than this number will reduce their production and this will cause low supply and ultimately a hike in the prices.

Although the economists do not forecast the oil price to reach $20pb, they do not forecast it to go beyond 60$ mainly because different countries resist to increase the price more than $60 for each barrel of oil.

Countries such as China continually intend to keep the production high using low energy price and enhance their economy, so they prefer the price to be far less than $100. They are seeking for a moderate price in the trading markets.

Also Saudi Arabia and its confederates in OPEC believe that the high price of oil is not in favor of oil producers inasmuch as the expensive oil is an appropriate economical reasoning for unconventional oil production at a high fixed price. They need many financial resources to extract for the production and therefore, they produce it only if the oil price is high.

Saudi Arabia believes that in such conditions which there are extra supply, the oil should not be permitted into the global market unless there is a reasonable demand for it and it is better to keep the prices within the $50-60 range.

On the other hand, the US supports the moderate price for each barrel and the low oil prices are against its policies and it is because although this country is the biggest petroleum producer in the world, it is also the biggest consumer as well. This has set as a suitable opportunity for the oil producers because the American economy demands low price energy to recover after economic recession of the years 2007 and 2008

Meanwhile, the US filled its petroleum reservoirs in the years before 2014 with the higher than $100 oil and evidently now with the decline in prices and consumption of stored expensive oil, the countrydesires to back a high but balanced price while their strategic reservoirs are filled with $30 oil.

Although low price oil has favored the economy of some countries such as the US, it has caused a tough situation for the economy of the other countries and specifically for the exporters.

Christine Lagarde, the Chief of International Monetary Fund, also believes that falling of oil price which has been in accordance with the growing economy of US, has strictly troubled the global economy. This is in the situation that US could rapidly adjust to it, while the improvement of the global economy movers forward slowly and erratically and the economic growth is not strong enough. Therefore, the US still may want to keep the price low to fill its economic gap with the other parts of the world.

This price drop is undesirable for the USA and the country is seeking to follow the balanced prices. The analysis from America’s Energy Information Administration demonstrates that the oil production of this country will drop off 640,000 barrels per day from the first three-month to the last three-month.

The International Energy Agency also has anticipated that the whole supply of the non-member countries of OPEC is going to decrease 600,000 barrels per day during this year. This may pave the way to price restoration.

On the other hand thanks to the price drop, the investments in the oil production have strongly been reduced and presented a reduction in investments to help to manage the increasing level of oil supply; however, adding Iran’s oil resources to the global market may complicate the prediction of the oil market.

Oil-rich countries’ pessimism for budgeting

At a glance on the budget of oil-rich countries for the year 2016, we can come to this conclusion that these countries also do not hope the price pace development to occur although they believe that the oil transactions is going to rise during the current year.

Most of the countries presume $40 to $50 for oil price for this year’s budget. Indeed the average oil price in the budget for the most exporter countries is $42.6 for each barrel. This number is so low for financing the budget of the all oil countries and in this regard the oil exporters must decrease their costs strongly to fit into the plans in 2016 and prevent a budget deficit.

Saudi Arabia presumes $29 to make its budgeting plan for 2016 which is the lowest rate ever considered in the budget. They appeal to sell the governmental organization stocks and decrease subsidies to compensate the oil price reduction. Probably they face 87 $billion deficit in this year but they do not want to accept the risk of the high oil price and producing mass reduction.

Russia also as the greatest exporter of the oil in the world has recognized the price of 30 $ for each barrel appropriate to the budget of the year 2016. Of course, the dependence of Russia on oil incomes is so lower than other oil producers.

In this regard, Oman can be considered as the second country, which is a pessimist to improve the oil market. This country has applied $35 for each barrel in the year 2016 in its economy resolution.

Iran has also decreased the risk of budgeting for Iranian financial year 1395 (2016-17) and has managed the budget in the next year according to $40 per barrel. Oil price reductions as well as prediction of slight growth in the oil price in global market have caused Iran to consider this price for each barrel. Some critics consider this price very optimistic.

Planning to fight against terrorism and reconstruct the country, Iraq has allocated $45 for the oil purchase in the annual budgets.

With regards to this decline, Kuwait has closed its budget forcefully. This country has considered the amount of $47 for each barrel to the budget of this year and this is in the situation that dependence of this country on the oil incomes is very high and the fluctuation of the oil price has an enormous effect on its economy.

Qatar and the United Arabic Emirate have closed their budget regarding 48 $ for each barrel of oil.

The rest of the oil-rich and petroleum exporter countries have estimated the oil price about $50 in the next year and accordingly have budgeted. The oil price in the global market will be changed due to the political and economic conditions and prediction is almost not possible; therefore, the countries have been made to manage the budget of the next year in regard to the financial need of their countries and current prices.

International organizations and oil price predictions

On the other hand, anticipations of the international organization indicate that the price of each barrel of Brent petroleum in the year 2016 will be in the range of $37 to 50. In 2016 the worse prediction is about $37 for the oil price and the highest about $50.4.

At first, many institutes expected the increasing trend of the oil price. However, the lack of interaction between the OPEC’s members has caused the predictions to slightly decrease. The International Monetary Fund estimated the average of Brent oil price for the year 2016 higher than other institutes and about $50.4. This fund had previously forecasted $56.42 for each barrel. Although IMF has anticipated a high price for each barrel of oil, it should be considered that this fund had determined the lowest price as much as $20 to $30 in the year 2016 and the forecast came true at the beginning of the current year.

Goldman Sachs who also had predicted the average of $49.5 for the Brent oil price, has modified his prediction to $39. By virtue of this matter that nothing has occurred in recent months, Goldman Sachs has emphasized that oil price increase is not expected in such conditions. The most important reason is lack of decision making specifically for producing oil in the recent meetings in OPEC. According to Goldman Sachs the accumulation of the oil is in a way that supplies are approaching their operational capacity, so it is necessary to decrease the price more in order to reduce the production mass. US Energy Information Administration also has announced $38 as probable price for each barrel of the Brent oil in the year 2016. This organization had estimated that the Brent oil is going to be dealt $40 each barrel.

The World Bank which had declared $51 as the average for Brent transactions in the past decreased its prediction to $37 each barrel which is the lowest rate within the international predictions.

Also Moody’s Rating Agency announced %4 decrease in its forecasting of the Brent oil price to in the year 2016. This agency’s prediction of Brent oil index and America petroleum index in the next year is now $53 and $48 for each barrel respectively. Moody’s has declared that the decrease in production of oil occurs no sooner than the end of 2016.

In conclusion, taking the above-mentioned points into consideration, one may come to the conclusion that the price of oil will increase more than $15 which is an equivalent of 50% by the end of the year. This number indicates that the price of petroleum in the US will reach $46 in the last quarter and the Brent oil price will be $48 in the same period of time.

Almost all of the international predictors and institutes believe that the oil price tends to increase at a slow pace. Of course, this will happen when the external factors such as political decisions, war in the oil-rich areas of the world, decrease or increase in the number of the drilling rigs, unconventional oil production, do not intervene the oil market.

References:

www.opec.org

www.moodys.com

www.goldmansachs.com

www.economist.com

www.bbc.com

www.imf.com

www.worldbank.org

www.oecd.org