The fact that oil prices from $ 30 returned to the level of $ 50 per barrel, investors have been interpreted as stabilization. The gradual return of capital into the commodity markets has put an end to the oil crisis, and yet even with the excess of world production over world demand for oil is unlikely to fall below 45 USD.
Recently, Saudi Arabia reported a record decline in their oil reserves. Analysts attributed this to the fact that domestic demand in the country increased, but the increase in production could be negatively perceived by investors (and so it is at peak values). Because in search of a balance between domestic demand, export and production levels of Saudi Arabia prefer to use internal reserves. This is another sign that maybe supply and demand will be adjusted by the end of 2016.
Despite the positive signals, there are still some factors of oil prices, which add to the prediction of oil prices uncertainty.
Factors of oil prices: 4 reasons not to jump to conclusions
1. Paris — COP-21
The Paris agreement under the UN framework Convention (concerning climate change and measures aimed at reducing carbon dioxide emissions) signed by 179 countries and signed by 22 April 2016. The provisions of the agreement enter into force from 2020.
The fact that the Paris agreement will enter into force, has long been known. But just now it is clear that if the world wants to limit climate change to 2° without addressing the issue with the collection of CO2 and its neutralization, by 2050 can not be consumed more than one third of the proven recoverable oil resources. According to the IEA, coal accounted for about 60% of emissions, 22% oil and 15% gas.
This suggests that a 10-year term remains the likelihood of reducing of oil consumption and therefore reduce its cost while maintaining production levels.
Discussions about that the greenhouse effect has a serious impact on the global climate, was conducted from the middle of 1930-ies, but the result has not resulted. One of the theories spoke about the need to reduce consumption of coal, oil and gas with the transition to alternative energy sources, other factors in the oil price — the rarity of the resource, and its future value grows over time. The fact remains that while consumption of world oil and gas resources is growing steadily. And because it is hardly possible seriously to expect that the Paris agreement somehow affect it. However, the risk that the era of low oil prices will come, still remains.
2. Strategy 2030 Saudi Arabia
The decline in oil prices has seriously hit the budgets of the countries-exporters of oil resources. Some of them were forced to resort to sovereign funds, but didn’t reduce the production. However, understanding the problem of petroleum dependence, some countries think about the need for transformation of their economies. No exception is Saudi Arabia, which has already announced its plans for diversification of its economy away from oil as the main budget asset. Factors of oil prices by the major OPEC countries in relation to the change of economic policy in the long term may have a significant impact on the “black gold”.
Based on the pricing policy of Saudi Arabia is trying to hold on to its market share. The Kingdom wants to reduce its energy costs. Plans of long-term strategy:
- partial privatization of the state company ARAMCO (the most expensive company in the world);
- focus on low energy prices (likely that Saudi Arabia understands that the demand for oil will be reduced. Because the country best lowest quotation in the area of $ 20, because it will extend to Riyadh oil age, whereas for other countries the price is unacceptable;
- keeping volumes of production, refocusing on other revenue sources for the budget.
Conclusion: the long-term policy of Saudi Arabia may again drop prices down. Similar factors of oil prices have played in 1985, when the country first reduced the level of production below the quota, to compensate for the loot other countries and keep prices. However, when oil revenues was not enough, the country dramatically increased production to the top level of the quota making the price to fall. And when other countries immediately suffered a loss and snapped the mining of oil, Saudi Arabia has remained profitable and in demand.
3. US shale oil
Previously, Saudi Arabia almost single-handedly controlled the world’s oil production, however, in 2000 years, US with its shale oil entered the market. Only if Aramco is a fully state-controlled, the shale oil is produced not by the scale of production, and through technological improvements in the process. In the development of oil shale involve private companies with a range of costs from 10 to 80 dollars per barrel.
In other words, the level of production of shale oil in the US acts as a stabilizer of the market, as the sector is not controlled by the state. Once Riyadh increases extraction reducing prices, shale companies can well, hold up a second bowl of weights. And Vice versa: if the oil goes into growth because of the policies of the Saudis, here US shale companies come into play.
Another advantage of the shale — fast-response wells. The production rate of shale falling by 80-90% within 2-3 years so the active design allows to quickly lower the costs of production. This means that, no matter what the world outrage would happen in the market, the United States may quickly repay these oscillations.
4. Referendum in the UK
Recently, the representatives of great Britain tactfully slowed down the procedure of exit from the EU. However, as expected. Motive: the UK does not want the topic of Breccia became an occasion for speculation on the eve of elections in EU countries (in Germany, for example), and so the exit procedure is delayed for at least 1 year.
Factors of oil prices — political and economic instability in Europe and the UK. London handles about 20% of global lending, and part of the companies serving the financial flows already thinking about moving to other financial centres in the Eurozone. Investors immediately responded to the result of the referendum, transferring money in gold, Antiques and real estate. And oil as a “haven” for escaping capital is unlikely to be of interest to investors, and hence the fall in oil prices provided further action on the part of Britain concerning exit from the Eurozone is likely inevitable.
Summary. All these factors in oil prices can affect prices only in the long term (5-10 years), but their power is so serious that we should not ignore them. And whether the current stabilization of the oil market, is “the calm before the storm” — the question.