Oil price changes hinge on output cut
Oil prices have again witnessed sharp fluctuations due to a range of factors. These include global economic conditions and the fundamentals of market fluctuations. They also include geopolitical and natural factors related to climate change and resultant disasters, in addition to worker strikes in troubled economies such as Iran and Venezuela.
Hence, when analysing oil markets and trying to gauge price trends, these factors must be taken into account so as to come up with results closer to reality. This is because many investment decisions in oil-producing countries are taken based on changes to prices, which could be the main source of funding for their budgets.
As for the positive factors affecting prices, last year’s agreement between oil producers from within and outside Opec was the most prominent breakthrough to help boost prices. It has been designed not only to be maintained but make further cuts if necessary, as evidenced by the Russian energy minister’s visit to Saudi Arabia last week. This will be significant towards maintaining relatively high price levels.
There is also an improvement in global economic conditions and noticeable growth rates in the US, China, India and the European Union. The EU is inching towards higher growth, including the British economy that faced multiple difficulties due to Brexit.
A possible oil production decline is expected in some countries due to technical reasons, economic difficulties and a drop in reserves. This comes at a time when investments in exploration had plummeted for the past seven years after successive prices collapses. This applies to shale as well, where investments have been rising.
The negative factors include the US oil shale production, now projected to increase by 660,000 barrels a day. Interestingly, this surge can be dealt with and absorbed by further output cuts through the Opec agreement, provided all stakeholders express their commitment to the new reductions.
New reductions
If that were to happen, it will successfully deal with increases in shale production, particularly because all countries have recognised the benefits of previous output cuts, whereby their oil revenues witnessed sizeable gains after such agreements.
Committing to new reductions poses a challenge due to some violations that some of the oil producers’ attempt to achieve greater returns. This will only result in supply and demand imbalances and another price decline.
The speculative factor plays a major role in prices gains and drops, creating a cycle of optimism and panic and with temporary repercussions on price peaks and troughs. This will increase the state of volatility and affect production.
But based on a broader perspective, oil prices will continue to see continuous and significant fluctuations, but the average price will be without doubt better and range between $55-$70 a barrel.
This will improve economic conditions in oil-producing countries, as many of them have set their state budgets based on a $50 per barrel level. This could trigger budget surpluses and deficit cuts at the very least — a positive development in itself.