News Column

Reasons behind oil price stability despite turmoil

August 26, 2014



Alsir Sidahmed

These are really changing times. It is no longer enough to have a coup, a plane hijack or violence erupting in one oil producing country to have prices skyrocketing.

The hotspots are all over the map of the Middle East from key producers such as Iraq and Libya to marginal ones like Yemen and the two Sudans to ongoing tightened sanctions against Iran. Brent crude prices that briefly rose in mid–June above $115 following the take-over of Iraq's city of Mosul by IS radicals dropped to 14-month low a few days ago.

Moreover, and following the downing of the Malaysian Airliner in mid-July, prices rose some 2 percent or $1.99 a barrel in New York Mercantile Exchange, but only to reach $104 a barrel and briefly before retreating again.

Who would have predicted that oil prices would continue trading at normal levels at a time of increased instability in the most important and volatile region.

In fact the Paris-based the International Energy Agency concluded in a July report that, "the oil market today looks better supplied than expected", though it highlighted the risks in some producer states.

There are several reasons that could explain what looks like a paradoxical situation. On top of these and aside from the issue of supply and demand is the fact that the world got used to turmoil and the market has adjusted to that fact accordingly.

It is not only the traditional media outlets that are full of stories of turmoil here and there. Social media channels are providing in real-time coverage of what is going on online 24X7.

That helped in reducing price speculation seen responsible sometimes from 10 percent of prevailing price at a time.

One result of this familiarity is that market getting used to this turmoil, which removes the sense of emergency from the scene.

Since things are going the usual, normal way, prices are not affected as well.

Part of the price spike is traditionally related to speculation, but with people carrying on with their normal lives despite growing violence that sense of drama is reduced to normalcy as well.

Moreover and despite violence rocking a number of producing countries like Iraq, Libya and Nigeria, production levels from these countries have not been affected as badly as expected and production volumes remain close to what they used to pump anyway.

One reason explaining this is that combating factions realize that stopping production is not in their interest as they need money.

One good example is South Sudan where during the civil war one of the first actions to take was to target the emerging oil industry and force the US company Chevron to suspend its operation.

Later and after a peace deal was signed the only reliable income came from oil exports and that is why the current rebel movement in South Sudan refrained from targeting the oil industry that lies in areas of its influence.

Add to that the growing production from the US and Canada which is having a positive impact and minimizing the climate of panic.

Canada has doubled its production, while US re-entered the market exporting products for the first time in decades dating back to post-World War II period.

The US, which used to depend on imported oil to satisfy its growing domestic oil demand, is no longer in that position. And the euro zone still suffers economically and its energy demand continue to be weak.

More important is the role played by the Gulf producers, led by Saudi Arabia, in ensuring that the market remains well supplied. These exporters continue to play the role of 'last resort suppliers'.

This simply adds to the confidence placed in Gulf producers that have good track record in bridging the supplies gap whenever the need arises.

It remains to be seen of course whether the world is getting used to uncertainties. But a supply crunch seems to be looming.

Available figures suggest that the world needs some 100 million barrels of oil per day by the turn of this decade from 90 million at present and at the time there no new deposits awaiting discoveries.

That is yet another challenge needs to look into early on.


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Source: Arab News (Saudi Arabia)


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