Knowledge
Global oil prices – the illusion of stability?
FOR THE FIRST ELEVEN MONTHS OF LAST YEAR THE CRUDE PRICE TYPICALLY TRADED WITHIN A RANGE OF $55 TO $70 PER
BARREL, BREACHING THE UPPER LEVEL IN APRIL AMID A CURTAILMENT IN RUSSIAN FLOWS TO EUROPE, AND A RENEWED
FOCUS ON US SANCTIONS AGAINST IRAN. AT THE TIME OF WRITING THERE ARE JUST THREE WEEKS LEFT IN 2019; THE YEAR
TO DATE HAS SEEN FRESH ECONOMIC AND GEOPOLITICAL TURMOIL, WITH 2020 SET TO SEE THESE ISSUES CONTINUE, SAYS
CORNWALL INSIGHT’S DR CRAIG LOWREY
As OPEC’s main producer, Saudi Arabia has
its own issues to consider in the form of the
long-awaited initial public offering (IPO) of
state-owned Saudi Aramco on the Riyadh
stock exchange. With the Kingdom seeking a
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75
70
65
60
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IPO and drone strikes overshadow Saudi
output
second largest oil field, prompting fears
of an extended loss of oil production and
exports from the Kingdom. A spike in prices
after the incident, the use of fuel stocks
held by the Kingdom and a quicker-than-
expected resumption in flows saw the market
subsequently retreat.
Iran remains under tough economic
sanctions from the US, these having been
stepped up in response to the drone strikes.
In addition, the Pentagon announced that
it would send military reinforcements to the
Middle East in the wake of the attack following
a request from Saudi Arabia and the United
Arab Emirates. Despite these geopolitical
issues the prospect of an escalation and
further military conflict in the region remains
seemingly low.
Front month ICE Brent Crude oil price, January 2019 to October 2019 (US$ per barrel)
Fears over the stability of the global economy
show no signs of abating as long as the
US-China trade war remains a key factor.
America’s wider attitude to the use of tariffs
on its other trading partners – including the
EU – has also added to concerns. The US-China
dispute, which has intensified over the last
two years, has been cited by commentators as
a brake on economic growth and has in turn
reduced expectations for global oil demand.
While comments in November 2019
from negotiators on both sides of the dispute
indicated a more conciliatory tone and, the
prospect of a wind-back of some tariffs, there
remain mixed messages from the White
House as to the Trump administration’s actual
position. This includes the prospect of a deal
delay until after the 2020 presidential election
in November 2020.
Although questions over demand growth
continue, the supply outlook remains buoyant.
This is being led by the US and in defiance of
an increase in the number of American shale
oil producers filing for bankruptcy or seeking
to restructure their debts with creditors.
Meanwhile, output from OPEC remains subject
to the output sharing agreement that the
group established with Russia in early 2017.
The goal of the agreement was to scale back
supplies in a bid to stabilise the market and
support prices.
Trade war concerns dominate demand
outlook
$2 trillion valuation for the company, such an
outcome depends in part on a high oil price.
The main objective of the floatation is to
secure funds to diversify the Saudi economy
away from its reliance on oil revenues.
This reliance was brought to the forefront
over the course of the summer given serious
production disruptions in the country. In
September, confirmation from the Saudi
Arabian energy minister that drone strikes had
reduced the country’s oil output by around
half, resonated across the energy markets. The
incident – the second of its kind in a matter of
weeks, and which Saudi authorities blamed on
Iran – took the Abqaiq crude processing plant
offline.
This site is seen as critical to Saudi oil
production and according to information
released by Saudi Aramco, processed around
half of the nation’s crude oil production in
2018. Also hit was Khurais, the country’s
Expectations for oil demand remain crucially
dependent on the global economic outlook.
Over the course of 2019 there have been
progressive reductions in oil demand growth
forecasts from both the US Energy Information
Administration (EIA) and OPEC – reflecting
underlying financial and macro-economic
issues.
Source: Intercontinental Exchange
Fuel Oil News | January 2020 17