The recent slide in oil prices for nearly all the blends in the market is of epic proportions.
Just after peaking at $89 per barrel, Brent crashed to almost $50 a barrel this week.
The graph below shows the world oil demand for the third quarter of 2018 (IEA).
The demand for the third quarter stood at 99.84 mb/d. Looking at the supply side of the equation,
the graph shows a oil supply of 100.74 mb/d. This gives an oil supply surplus of 900,000 bbl/day.(IEA)
As a comparison The graphs below show the oil supply and demand story for the first quarter of 2018.
The supply surplus in the second quarter was 120,000 bbl/day.(IEA)
Judging by the visible trend, the prediction of sliding oil prices was elementary. The general trend of supply overlapping demand commenced at the start of the year 2018. Nevertheless, prices continued to increase from the start of the year, peaking around mid October, after which they floored.
If the trend seemed to be so straightforward, why did the prices climb through the Q42018 ? and what warranted the hysteria in the energy industry that followed around the possible oil supply crisis as a result of sanctions on Iran and Venezuela.
There appears to be little cause and effect relationship between supply and prices if we follow the data by the International Energy Administration(IEA). The trend seems to be purely arbitrary if not counterintuitive. That is, unless the ulterior geo-political perspective isn't excluded from the equation.
One country greatly affected by the increase in oil prices was the United States. Since the U.S is a long term oil importer from the middle east, rising prices placed a financial constraint on its balance of payments. President Trump has been very vocal about this issue, often lambasting OPEC for artificially inflating oil prices. Moreover, at first, the nuclear proliferation threat from Iran seemed to be dealt with explicit rigidness, however, economic stability concerns ultimately perpetrated the U.S government to issue sanction wavers in an effort to make sure that there were no unforeseen supply gaps in the oil market. Presumably a win-win situation for both parties in a time of possible crisis.
The stakeholder vexed by this arrangement, also America’s chief ally in the middle east, was Saudi Arabia. An exclusively oil-based economy, any price slide would further vitiate Saudi Arabia’s financial situation; ergo, Saudi Arabia would not favour drastic reduction in prices, and would retaliate at the notion of it. Although OPEC’s president and Saudi Arabia’s minister for natural resources stated unequivocally that there were no plans to place an embargo of any sort, OPEC+ has long been hinting towards a reconciliation with its partners to introduce a supply reduction scheme. This would have been the most likely discourse, had there not been one major turn of events.
In October 2018, an unfortunate sequence of events unfolded, which also coincided with the falling oil prices. One of Saudi Arabia’s most known and regarded journalists, Jamal Khashoggi, was—according to Turkish authorities—lured into the Saudi consulate in Istanbul, and murdered before being moved to an unknown location. The family of Jamal Khashoggi was of high prominence and reputation, thus the incident brought worldwide attention, especially from human rights organisations. Germany and Denmark have now cancelled all arms trade deals with Saudi Arabia, and certain countries are also demanding ruthless accountability. Amid the unanimous mortification, and the CIA report released earlier this month which indicated that the crown prince Mohammad bin Salman himself was involved in ordering the kill, there have been reports that royal members of the ruling family in Saudi Arabia are attempting to hinder MbS’s ascension to the throne. This saga of events has placed the leadership of the kingdom in a very precarious and uncertain position.
The existential threat posed from this event has forced the rulers of the kingdom to be more flexible, and abandon the previously adopted strategies. The oil price now sits at 50$/barrel, very convenient for the major oil consuming countries, who are all—at the moment—mum about the issue which they had once so vehemently admonished.
Although the price correction has provided an economic relief for many countries, it poses a paradoxical situation in the United States, where the reduced price has improved the balance of payments, but poses a threat to its own upstream oil industry, as the break-even range for North American Oil sits between $30-$50. If prices continue to slide, the North American oil industry would be in for some serious reevaluation. Since the price hit the $50s, rig count has decreased, and the skepticism regarding the industry has increased. Facing these conditions, investors are increasingly cautious.
As it happens with most controversial issues, the heat of the moment will pass. What will follow next, could be the oil crisis wildly predicted since the beginning of 2018.
Saudi Arabia will gradually look to recover prices by curtailing supplies. Especially in the next couple of years, as the Aramco IPO will supposedly take place around 2020 - 2021. If the current state of prices takes a toll on the north American oil industry, or handicaps proposed projects in the North Sea, there will be a dangerous supply crunch, considering the demand of oil doesn't seem to be slowing down any time soon, and OPEC with all its resources will simply not be able to supply the demand.