Global redistribution of oil market
Baku, Azerbaijan, Dec. 19
By Vagif Sharifov - Trend:
OPEC's dumping oil prices, Saudi Arabia's desire to expand its market share, and expectations of coming of Iranian oil after removal of sanctions on Tehran, have forced the US to urgently take the historic decision to start exporting its own oil to the world markets.
Experts have already reacted negatively to this news, saying that oil prices will fall significantly, at least, due to a psychological factor. However, the US itself doesn't think so - the Department of Energy believes that by 2025 the price of Brent will reach $90.23 per barrel or only $0.18 per barrel less than if the export ban had been kept.
Greatest difficulties will be faced by the business in the US market, where a limited supply of WTI will increase its price at oil refineries, leading to higher prices for gasoline, and dragging inflation in the economy. On the other hand, it will be easy for China, as it will be selling its consumer goods in the US for higher prices, while their prime costs being kept due to lack of a significant impact from WTI on the Brent oil price.
Meanwhile, Saudi Arabia - the main market player physically pressing the prices - is trying by all means to "pour" oil even to places where others have previously worked. This, in turn, causes a conflict of interests with Russia, which, because of different prime costs, can't afford such level of dumping in Europe, as Saudi Arabia does. Apparently this "overdumping" game will soon be joined by the US. By the way, the estimates presented by the US Department of Energy look strange against the backdrop of the fact that Iran expects the lifting of sanctions in Q1, 2016 in order to begin oil exports.
There is no doubt that Iran would offer its oil cheaper than the market price, pursuing the following objectives:
- to gain market share as fast as possible;
- to fill its budget with oil money as quickly as possible to use them for restoration of domestic market infrastructure, including the construction of new oil and gas pipelines.
The situation will lead to an unplanned meeting of OPEC in the first six months of 2016, where the countries will blame each other of deliberate glutting the market. But the decision will not be taken to cut the production because there will be the US oil on the market. Any reduction will immediately lead to a decrease in a market share, despite the high breakeven price of the state budgets of Iran, Algeria, Iraq, Saudi Arabia and the UAE. Libya will be in the worst situation. Its state budget may be deficit-free only at the world oil price of $207 per barrel.
A $30-35 corridor per barrel of Brent was observed several times for the last nearly 30 years - in 1990, 2000, 2003-2004 and in December 2008. The price returned to the previous level seven years later - in December 2015. The creation of artificial deficit of oil or loosening of the situation in the major oil-producing regions can contribute to a great increase in the oil prices. The history of the oil industry shows that during the year before the Gulf War, the average Brent price was $18 per barrel. During the war, the price was $29, and even reached $41. But the day before the war - August 1, 1990, the Brent price was $19-20 per barrel. The next day after the war - March 1, 1991, it returned to the same level - $19-20 per barrel. There are many similar examples, namely, the Islamic revolution in Iran, the Iran-Iraq war, the Asian financial crisis, September 11, the second war in Iraq.
The global redistribution of the oil market between Saudi Arabia and the US is obvious. OPEC ceased to be a locomotive. It became a purely commercial company making a profit regardless of anything. Many specialists believe that there is no need for the cartel any more. Canada Alberta's Finance Minister once said that we need such a position when we would not listen to OPEC to decide how many schools we should build.
If OPEC wanted, it could increase the prices, forgetting about the market share as it was in 1973, when the cartel cut its production so that the price has risen from $3 to $12 per barrel.
Vagif Sharifov is an analyst, expert in oil and energy markets.
Follow him on Twitter: @VagifSharifov