Why oil prices slide down?

By Vagif Sharifov-Trend:

It is difficult to find the proper analogy to fit what has happened to the oil market last fall.

Without warning as though moved by some invisible hand, the oil market started to drop last Sept. 5. And to this day the price of oil continues to drop. But let's turn back for a moment and look at the recent history of oil.

As an example during the year prior to the Gulf War the average Brent spot price was some $18/bar. During the Gulf war the average price rose to $29/bar. Now let me stop at one interesting trick: one day prior the official start of the Gulf war - on the 1 August 1990 - the Brent oil price has been at $19-20/bar., but the next day after the storm has remitted - on the 1 March 1991 - the price went back exactly at the same level - $19-20/bar.

There are many examples in the history of modern oil, such as the Iranian revolution, the Iran-Iraq war, the Asia financial crisis, September 11, the Iraq war and global recession. Indeed looking back at the last 30 years of oil history this is not the first time the price of oil in September was less than it had been in August. Even more, one can add that last September's oil price drop wasn't as big as it was in September-1998 when it went down more than 11 percent. So except for the last fall there has always been a strong reason behind the drop or climb of the price of oil, including wars, recessions, oil embargos and the attempt by the US 'seven sisters' to control the of oil.

Table below shows the difference between oil prices in September vs August:

We can now analyze what has happened with the world oil market since the last price fall in September-2014:

- Shell and Qatar Petroleum denied building the largest petrochemical plant in Qatar worth 6.5 billion dollars;

- The British Premier Oil freeze its plans to oil project development in Norway and in the Falkland Islands waiting for the price to get above the 50 dollars per barrel mark;

- Many oil producing countries cut their state budgets;

- Russian ruble losses ground to the US dollar and euro;

- Canadian Natural Resources, who operates in the North Sea and in Canada, cut its capital expenditures for the current year;

- Norway's Statoil denied operating several contracts on oil exploration in Greenland;

- The US WBH Energy, who produced shale oil and gas in the United States, declared bankruptcy;

- Everyone has forgotten the Arctic oil and gas drilling perspectives.

What is going on?

Why ones need to artificially decrease the oil price getting back in turn the lost profits worth billion dollars? Whether the reason is to suppress the weak oil companies? Give some fresh air to the US economy? To kill economically the entire Arctic oil projects? Bury the shale oil revolution?

It seems there are two reasons:

- The 'good old' cold war between the USA and the USSR/Russia. Decreasing oil prices have been used as additional sanctions against Russia because Ukraine. So the lower the price of oil, the less dollars the Russians earn. The less income, the weaker the Russian ruble. The feeble economy can't manage to keep the oil production on a high level. The result: the oil production in Russia declining. Who wins then?

- At least since 1985 the Saudi Arabia has always produced less by double than Soviet Russia. Everything has changed when USSR collapsed in 1991. As early as in 1992 the new Russian Federation produced by 12 percent less than Saudi Arabia and this figure had been falling till the 2001. Then Russia started to plainly increase its oil production and in 2009 it has reached some old Soviet Russia's oil production rates.

The table below shows how the two top oil-producing countries extracted oil during the years:

It seems like the oil prices have returned to their 'Homeland' - its historically average level. Considering the 30 years range data it is obvious that the average Brent spot price stood at 51.59 dollars per barrel (in 2013 prices adjustment). Since the beginning of this year the average price of Brent stood at 49.9 dollars per barrel. Historically the 40-50 dollars per barrel (in 2013 prices adjustment) oil price's corridor has kept longer than 100-120 dollars per barrel price range which we've seen during the last years.

The expert community does not predict anything supernatural regarding the oil prices during this year. The forecasts as from experts, analysts of banks, oil and consulting companies indicate that the average oil price seems to be 60 dollars per barrel:

- The representative of the Saxo Bank in an interview with Russia's RIA Novosti said oil prices may rebound at 52.25-54.5 dollars per barrel;

- EIA in its last report in January predicts the average price of Brent at 58 per barrel this year;

- According to the Russian news agency "Prime", Raiffeisen Bank conducted a survey questioning 150 analysts. More than 90 percent of them believe that the average price for Brent will remain in the range of 50-80 dollars per barrel.

- Analysts by Goldman Sachs think the average price of Brent is going to be 50.4 dollars per barrel.

- Bank of America Merrill Lynch believes for 40 dollars per barrel of Brent this year.

- President of Russian oil company LUKOIL believes that the average oil price will be around 60 dollars per barrel, RBC reports.

- ING Commercial Banking experts considering that the average price of Brent in the first quarter will be 50 dollars per barrel with rise to 60 and 75 dollars in the second and third quarters respectively. The average price for the year they predict 68 dollars per barrel, RIA Novosti reports.

- The Morgan Stanley's reference case shows that the lowest price is going to be in the second quarter 2015 - 57 dollars per barrel vs 69 dollars in the first quarter, RIA Novosti reports.

- A few Swiss banks predict the price of Brent at 70-85 dollars per barrel.

So why oil prices slide down?

We have now seen the global oil market repartition by historically proven methods. In 1973 when the Organization of Arab Petroleum Exporting Countries (OAPEC) initiated an oil embargo, they reduced the oil production as the oil price rose from 3 to 12 dollars per barrel. Using the same methods today the oil cartel refuses to reduce oil production to keep the prices at a high level. During the oil embargo 42 years ago OAPEC aimed to pressure the international community to reduce Western countries' support of Israel. Nowadays OPEC uses the same methods but with different goals. Let's see what is going to happen.

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Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter: @VagifSharifov