Seeking solutions to oil price problem

Tuesday, 2018-12-25 12:37:52
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A pump jack on a lease owned by Parsley Energy operates at sunset in the Permian Basin near Midland, Texas US, August 23, 2018. (Reuters)
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NDO – After a period of recovery, oil prices in the world market have plunged in the last weeks of 2018. The International Energy Agency (IEA) and economic analysts have mentioned the excess supply and the gloomy outlook of the global economy as the two main reasons for the plummeting prices of the “black gold”.

Oil prices have dropped by 36% since last October due to a big surge in supply and a decline in the world demand. In November, there was even a time when oil prices fell below US$50 per barrel. Most economic experts said that the downward trend of oil prices will continue in 2019. In its report on Short-term Energy Prospects, the US Energy Information Administration (EIA) has lowered its price forecast of US West Texas Intermediate (WTI) crude in 2019 to US$54.19 a barrel, down US$10.66 from the previous forecast. The EIA also forecasts the prices of Brent crude will remain at US$61 per barrel, down US$10.92 from the previous figure.

Analysts stated that the main reason for the decline in oil prices is the excess in supply. The EIA said their forecasts were made based on the fact that global oil production is now at a record high, especially in the US, while the demand for oil consumption in the world’s no. 1 economy still remains the same or even lower than usual. On the world scale, the IEA’s report forecasts global oil demand in 2019 will be maintained at 1.4 million barrels a day.

The world economy is facing multiple difficulties, which can be seen as another important reason for falling oil prices. The economic growth rate of China and some other economies has slowed down, leading the demand on oil consumption to weaken. After a “decade of loss” due to the financial crisis in 2008, economies in the world have gradually recovered, but now the bright spots on the global “economic picture” are fading. Instead the risk of a repeated recession is emerging with increasing challenges from financial risks, the US-China trade war, and negative impacts from the United Kingdom leaving the European Union (Brexit). Many ideas stated that the world economy is “at the threshold of a growth slowdown era”, and it is likely that the new recession will take place in the next two to three years. Some financial institutions such as the World Bank (WB) and the International Monetary Fund (IMF) have expressed concerns that the US-China trade war has prevented the growth momentum of the economies. Meanwhile in Europe, the Brexit talks between the UK and the EU have triggered big concerns as the negotiation process has yet to conclude despite the deadline drawing near. A yet-to-be-decided future of Brexit has been damaging the economic growth of the UK and the EU, as well as the global economy.

Given the aforementioned context of the world economy, in its latest report, the IMF has lowered its estimated global gross domestic product (GDP) growth at 3.7% for this year and in 2019. In the period of 2022-2023, this figure will be reduced to 3.6%. When economic growth is difficult and oil demand declines, oil producers and exporters will face many difficulties. World Bank Vice President Mahmoud Mohieldin has warned that if oil prices fall, the growth prospects of Gulf countries in 2019 may have to be adjusted lower than the growth forecast of around 3%. Pressure on the oil industry in the US and Europe is also very clear when oil prices plunge. The EIA said that by the end of last November, excess supply has caused the profit from US refined products to plummet to the lowest level in five years. Meanwhile, for the first time in nearly five years, the profit from gasoline in Europe has also dropped from mid-October.

In the context of slumping crude oil prices in international markets, the Organisation of Petroleum Exporting Countries (OPEC) and other oil exporting countries recently announced that they will cut oil production, considering it as a “special remedy” to stabilise the oil prices. To date, OPEC member nations and non-OPEC partners have agreed to cut crude oil production by 1.2 million barrels a day. Iran recently decided to “green-light” the reduction of oil production at about 800,000 barrels per day from 2019. As planned, in their April 2019 meeting, countries will sign a long-term agreement on formalising cooperation between OPEC and non-OPEC countries regarding oil production.

With the aforementioned solutions, oil exporting countries are hoping that the momentum of the world plummeting oil prices will slow down and start to balance again from the beginning of 2019. UAE’s energy minister Suhail Al Mazrouei, who is also OPEC president, said the deficit in the current oil price market is not remarkable compared to in 2017, voicing his belief that this situation will end in the next one to two months. However, many analysts stated that the radical cause of declining demand is the weak economic growth. Therefore, by only cutting oil production, oil exporting countries can only solve half of the oil price problem.