Oil Prices: Wind Of War And Peace Or Manipulation Of Oil Giants?
Roni Stern | Apr 01, 2015 04:12AM ET
A barrel of oil is among the most traded commodities in the world and as one, it holds a high influence on the world's economy hence many traders are investing in both directions - increase or decrease in value. The "Black Gold" as it is referred by many, is heavily influenced by various parameters including the global economic growth rate and of course, the geopolitical tensions.
For several months now, we are watching the oil prices decline to levels which were not reached since January 2009. This market behavior raises within us two important questions: The first question is why, and the second question is how low can the oil go?
The history of oil prices shows that there were NO cheap oil prices since before the first oil crisis in 1973. In 1960 the OPEC organization was established. Consisting the countries Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Ecuador, Venezuela and Angola, it established to determine along with the oil companies the pace of oil production and thereby to control the commodity's price and to assure that the member countries will receive more money for the oil they export.
By the year of 2008 Oil prices jumped from $ 3 a barrel which was the price at 1973 to $ 125 a barrel. However, what goes up must go down. And so by the end of 2008 the oil price started dropping. This sharp decline was explained by economic commentators with the concern that the harsh recession in the global economy might continue at least until 2010. Other suggested reasons were for example cutting oil consumption in the US (the world's largest oil consumer), which dropped in November 2008 by 7.4% over the same period the previous year, the oil Inventories in the US which rose to 318.7 million barrels during January 2009 and the inability of control by OPEC organization, which produces about 40% of global oil.
Skipping 4 years to the summer of 2014 which was a turning point for oil prices worldwide:
June 2014: Oil price is $ 112.36 a barrel - On June 11th, during a meeting of OPEC in Vienna, the oil ministers were informed of the slowdown in global demand for oil and its supply growth, even so, Saudi Arabia assumed that oil prices are safe.
July 2014: Oil price is $ 106.02 a barrel – The price which was above $ 100 a barrel increased the supply from Russia and Brazil. The US monthly production rose to a peak of nearly 30 years after technological innovations, encouraged by cheap credit provided by the quantitative easing of the Federal Reserve, revealed more oil from the oil shale in the US. Yet, Saudi Arabia questioned the sustainability of "the shale revolution" considering the production costs - the financial balance prices of shale oil production range was from $ 30 to $ 90 a barrel, compared with only $ 10 a barrel cost of producing Saudi oil.
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August 2014: Oil price is $ 103.19 a barrel – While oil demand declined in Europe much more than expected, there was a race between all giant oil suppliers to become the main supplier for China. Refineries in China, Vietnam and India began to report lower consumption of crude oil and that led to a series of cuts in export prices for Asian buyers. The aggressive pricing in question was a sign of Riyadh fight on its market share to become the most important supplier in Asia.
September 2014: Oil price is $ 94.67 a barrel – At this stage there were speculations about a dispute in Riyadh. According to the rumor, high ranked officials were claiming that the falling oil prices is no more than a passing phenomenon. They claimed it was time to teach a lesson to the high cost energy manufacturers and their funders, to maintain the competitiveness and long-term Saudi oil place in the energy composition.
October 2014: Oil price is $ 85.86 a barrel – Riyadh decision making is often slow and non-transparent, but the first signal of turning point came with the words of the Saudi spokesmen that began making messages which affected the investors' community; although output cuts were not taken completely of the table, they were "highly unreasonable."
November 2014: Oil price is $ 70.15 a barrel – The days before the OPEC conference in Vienna on November 27, were marked by calls of the poorest countries in OPEC organization such as Venezuela and Iraq to cut on manufacture. It was an impossible situation for OPEC to solve alone, what brought Rafael Ramirez, Venezuela's OPEC representative to put pressure on Naimi to agree to a deal to cut manufacture and so he arranged a meeting with the Russians and Mexicans. I the meeting, the Saudi oil minister said that since Russia and Saudi Arabia are producing about 10 million barrels per day each, the production cuts will have to be equal. The Russians refused. Naimi, in return, enlisted the support of Gulf allies to an unchanged output target of 30 million barrels a day. The other OPEC countries quickly surrendered.
December 2014: Oil price is $ 57.33 a barrel – Three weeks after the meeting in Vienna, oil price was below $ 60 a barrel, the bottom of the market as it was thought among the Gulf countries. In an interview with the MEES, Naimi was quoted for saying that "Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce? That is crooked logic. If I reduce, what happens to my market share? The price will go up and the Russians, the Brazilians, US shale oil producers will take my share."
January to March 2015: Oil price is between $ 55.05-44.03 a barrel – speculators keep on speculating, and the market is filled up with different opinions. The OPEC organization countries are certain they did the right thing when they refused to cut on manufacture. Oil price reached a level where it is still profitable almost only to the organization countries.
While traders are buying and selling, some of the analysts are screaming WAIT! The likelihood is that the oil prices will drop below the level of 40 before spiking back up. And the reason is very simple.
In an industry that is being managed by men who are in an ongoing war of proving themselves as the owners of the 'bigger one', only he who owns the 'bigger one' can actually win. And in all that is related to oil, it is safe to say that even when wounded, Saudi Arabia definitely has the 'bigger one'.
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