The last few years have been strange for the oil industry. There hasn’t been a downturn as lasting since the 1990’s and while many are hopeful that prices will soon not only recover but actually boom, a healthy dose of skepticism lingers as it seems like the bounce back is taking longer than expected.
Experts believe that it will be awhile before prices are able to break $90 a barrel again. Hope lies in the fact that just last year, even after prices posted at just below $30 a barrel, they were able to get back up to $50 by the end of 2016. Today the projected margins are very wide, with analysts expecting prices to be anywhere from $40 to $70 by the closing of 2017 but at the same time being very timid with such predictions since times are volatile and the socio-economic conditions of many of the world’s main producers are apt for deeply affecting the situation. What are the reasons for this? Which factors are helping this volatility? Today in Suzzanne Uhland’s Blog we want to take a look at the situation that is developing in different places of the world and how it is affecting oil prices, and subsequently the price we pay for gasoline at the local pump.
The Organization of the Petroleum Exporting Countries is a group of 14 nations that account for the production of over 40% of the world’s oil supply. OPEC’s influence is something that cannot be dismissed and that is why they also exert a lot of power onto the decisions that shift oil prices. In November of last year, OPEC members agreed upon cutting production of oil with the goal making prices go up due to limited supply. This type of move is done with the purpose of undercutting competitors and also of maintaining shale-oil producers over that margin that makes them profitable. Right after the cut, results became evident and the price quickly reached $50 a barrel, showing once again that OPEC’s influence is important and relevant today, even with the new technologies and key players coming into the industry.
The truth is that this month, OPEC once again came to a joint consensus of extending the output cut for another 9-months. Such agreement will prolong the decision to keep more than 1.5 million barrels each day from seeing the market for the rest of the year. The decision is not quite official yet, but sources report that it will be the most likely outcome since this course of action has worked so far in 2017 and it seems like the only way to put a floor to the quick dive oil prices suffered before the decision of the initial cut was reached last November.
The situation in Iraq is also escalating to become something of a serious concern for oil prices. Back in 1991, US support allowed for the Kurds to form an area in northern Iraq where they could autonomously run a government, have a military force and also export their own oil. Iraq constantly quarrels over the legality of such trades. Even though both of these factions are allied against the Islamic State, tensions are running high due to a recent Kurd vote for independence from their host nation. Many key players involved with their own interests over the possible separation of a Kurdish state, agree or disagree on the referendum, something that has given an opportunity for Iraqi forces to move towards Kirkuk with the goal of seizing oil fields and other tactical positions from the Kurds.
The region around Kirkuk is responsible for around 10% of the total oil that comes out of Iraq in general. Numbers like this are of great concern, especially during a time when the prices of oil are so sensitive to geopolitical unrest. This atmosphere could sustain a rise in oil prices is demand stays high as well; we just have to see what happens.
Another problem happening right now in the world of oil is coming out of the South American country of Venezuela. It seems like some of Venezuela’s major buyers of oil like the United States, India and China, are complaining about the low quality of the oil they are purchasing. It seems like the crude is contaminated with dirt, water, and other pollutants that severely diminish the ability refineries have to properly process the product and convert it. Sources report that this is happening due to the poor maintenance PDVSA is giving their facilities, something that is severely affecting the quality of the product being exported. As we know, the situation in Venezuela keep deteriorating and it was just a matter of time before their production of oil was affected but such shortages. In this moment, many clients have canceled shipments and sue their companies over the resources they are spending by having to return a product that they deemed unusable.
* Featured Image courtesy of Zukiman Mohamad at Pexels.com