TurmOil

The beginning of the new year has came with alarms in many areas, from the pure financial sector to the commodity sector, to the geopolitical tangle in Middle East. Among those, there is also a terrible performance of the oil price.

Since mid-2014, price per barrel of oil began to decline from an average price of 105-110 USD, which was almost stable for a long while. After this date, prices had started to decrease continuously. Properly speaking, this phenomenon cannot be called as “collapse” or “shock” since it happens smoothly without jumps and it has been a constant descent.

However, it brought with it a number of dynamics which will shape months ahead. Few weeks ago, a remarkable news was the minimum price reached by oil, which brokes though the threshold of 30 USD per barrel.

ORIGINS

Generalizing, it is possible to identify three major causes that lead to the actual economic stalemate.

First, the new slowdown of the economy worldwide, which weakens the world demand, with particularly regard to the Chinese giant and oil-consumers economic troubles (USA and UE as firsts). They would boost the economy again, but in vain. While on the emerging countries side, they are facing the FED’s choices about interest rate.

The second cause could be described as shale gas effects on prices, which probably trigged this “barrel war” on prices. Benefiting from huge investments in past years, shale production leads oil exporters to overproduce in order to displace them. For some time, new energy producers gained from their low-price positions, making profits. Now the situation has reversed, with a super cheap oil price that in turn displaces frackers. As heard many times in newspapers, shale gas is convenient only if oil price is higher than 60 USD, otherwise they run into losses. That is the strategy Saudi Arabia is putting in place somehow, a sort of dumping policy to kill competitors through even more low prices.

Last, the geopolitical equilibrium in the Middle East, where Iran is trying to establish its influence over the neighboring States and among western diplomats. Iran is developing those key industrial sectors to reach their autonomy: oil and other energy sectors.

Impacts of these new economic wars of oil and gas lead to many losers (Venezuela, Niger, Kazakhstan, American frackers, etc.) and some winners (Saudi Arabia, UAE, Kuwait, Iran). Of course, consumers benefit from this. But on closer inspection, there are not so many winners. Even in these countries they were drafted budgets with estimates oil prices around 20 USD. For instance, Saudi Arabia has recently introduced austerity measures, despite reserve funds of about 700 billions for this purpose. In Russia instead, a similar scenario took place. Here, in face of a fall in prices, ruble offset the change: devaluation occurs reducing costs and inflates profits of exporters, who received a foreign currency exchange. While other less wealthy countries will suffer heavily from this low price.

EXPECTATIONS

Looking at this unsustainable and damaging moment, many actors are eager to an agreement to avoid future distresses.

The last sessions show a weak rise in oil price: the Brent returned around 32 USD, driven by the expectation of an imminent emergency summit of OPEC to coordinate a cut in production worldwide. Nevertheless, the OPEC governor is skeptical and foresees a critical issues at least until 2020. The World Bank has revised its forecasts with a negative outlook, with a long period of recovery in prices: 37USD in 2016, 48USD in 2017, 51USD in 2018. Similar estimates have been developed by other banks.