Issues confronting oil markets

Byadmin

Dated

April 23, 2022

Issues confronting oil markets

Elsa SC S describes a steadily complicating situation

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Issues confronting oil markets is facing a crisis that is deepening by the day creating a global sensation. The Issues confronting oil marketsis experiencing a tough ride and it is not settling down. Brent crude, the international Issues confronting oil markets benchmark, broke $100 a barrel in February for the first time since 2014, and eventually peaked at $130 a barrel in early March, its highest price since 2008. Much to the chagrin of oil consumers the price is sill swinging between $100 a barrel and $120 a barrel. This is a cause of concern that is complicating the consumer market and the apparently unending price fluctuation is increasing hitters around the world.

While it is not the decisive issue yet the war in Ukraine is only partly to blame for the wild price movements. Another factor is that the shale oil industry, once touted as a new bulwark against price shocks, is not as forthcoming as the market needs greatly disconcerting for the protagonists of this type of oil. Most importantly, the efforts of the western world particularly America to calm down the market are apparently bogged down by long-standing oil geopolitics.

Issues confronting oil markets

Though it is not the main driver of the issue Russia’s war in Ukraine might seem an obvious explanation for recent price hikes. After all, Russia is the world’s third-largest oil producer and largest oil exporter. Western sanctions after Russian invasion of Ukraine hit hard, prompting import bans on Russian oil, foreign oil company business exits and payment complications for those trading Russian oil. Analysts project 3 million barrels a day of Russian crude may be subject to disruption, while oil prices could rise as high as $185 a barrel by year’s end.

However the point to be noted here is that even before Russia’s troop buildup began last year, two things had been steadily driving prices higher following the pandemic-linked price drops in 2020 — rising global demand and the controlled unwinding of the historic production cuts made by OPEC Plus, the loosely connected association of OPEC and Russia-led non-OPEC producers. In fact, in mid-January — when a full-scale invasion still seemed unlikely — analysts were warning that oil prices could surpass $100 a barrel if rising demand and disappointing supply continued. It follows that even if the war’s effects on oil prices dissipate, prices will probably continue rising if the market fundamentals remain unchanged.

To mitigate the impact of the supply shocks, countries have turned to existing tools to compensate for the lost barrels: International Energy Agency members agreed to release 60 million barrels; the United States said it would release 180 million barrels, the largest withdrawal in its history. Very surprisingly, however, US shale oil suppliers have not joined the fray as three-digit oil prices should signal windfall profits for these companies, whose average break-even prices sit around $50 a barrel. Moreover, shale wells can also be commercialised within months, if not weeks. Conventional oil wells, in contrast, require several years to develop.

This rapid-response capacity is why analysts have predicted price ceilings as low as $50 to $60 in the shale era. In this context it is mentioned that the slower-than-expected market intervention is due to the fact that the American shale industry consists of small producers. The industry lacks a central authority to coordinate a united supply boost and suffers from huge variations in production conditions, making a prompt and effective intervention highly unlikely in the short term.

With shale producers not forthcoming, the United States, the world’s largest oil producer, is locked in a game of oil geopolitics, aimed at persuading large traditional foreign producers to pump more oil. Unfortunately, several factors are complicating US efforts to calm the market this way. It is opined that the earlier shale boom and the Covid-19 pandemic had the unexpected consequence of galvanizing OPEC Plus, allowing Russia and Saudi Arabia to shore up oil prices. To the market’s surprise, OPEC Plus members have mostly stayed in compliance with the organisation’s production quotas. Having met their initial objective to control prices, OPEC Plus members continue to stick together even with the war in Ukraine and trying to influence prices in their favour.

It is also pointed out that Saudi Arabia, which historically has tapped into its spare production capacity to help ease the market tightness caused by geopolitical disruptions, has so far refused to act this time. Saudi leaders declined to discuss the energy situation with President Biden and made no promises to boost oil production during British Prime Minister Boris Johnson’s 15 March visit to Riyadh. The reluctance to increase production may be politically driven, or may be a sign that Saudi Arabia does not have as much spare capacity as it claims. Either way, the world today seems as beholden to Saudi oil policy as it was during the pre-shale era. The Russian war in Ukraine and the reactions of the oil market are uncomfortable reminders that oil is a globally traded commodity and cannot avoid the pulls of oil geopolitics.TW

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Elsa Sc S is doing her graduation from LUMS & a keen researcher

 

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