With oil prices remaining stable for four continuous years from 2010 to mid-2014 at $ 110 per barrel in June 2014, they plummeted to $ 35 per barrel by February 2016. In early 2002 to 2012, quadrupling prices restrained demand significantly. The US imposed a ban on soaring oil imports. The US, with new technological improvements in equipment and the need to foster oil energy for the future, stimulated the country to switch to shale production. As the shale revolution eased locating the shale drills, it increased the output from 160,000 BPD in 2011 to 1.2 million BPD in 2014. Despite the unrest, Libya and Iraq recovered faster and started producing - with Libyan production exceeding 900,000 BPD. Falling metal prices slowed the global activity which further added to the oil price decline. Saudi Arabia, despite the supply glut, announced non-interference of the oil production in both OPEC and non-OPEC countries and, in November 2014, they decided to contain the collective production to 30 million barrels a day.
Similar to the 1986 oil market failure, 2014-16 was one of the largest declines since World War II driven by a supply glut. The unprecedented oil market plunge worsened the oil-exporters. Unlike other countries, oil-producing countries rely on the oil market to boost their nation’s income. Analysts used fiscal break-even estimates to gauge the vulnerability of oil exporters. Barring Saudi Arabia, Kuwait and UAE, the fiscal break-even deteriorated for other countries in the subsequent years. However, Saudis foreign reserve holdings saw a significant drop by 16 per cent in 2015 (to $ 555 billion). As for African countries, the government used revised break-even prices to account for the falling prices in 2015 with Nigeria’s oil price at $ 62. Some countries surpassed this situation as they had appropriate plans and saving funds to combat the rising deficits.
Owing to the price fall and as predicted, Saudi Arabia in April 2016 established the production quota system among OPEC members and major non-OPEC producers. This initiative was an utter failure as the Saudi crown prince backlashed at Iran rather than to benefit from the potential gains of the production cut. In November 2016, OPEC+ accorded to production cuts in Vienna. The agreement was renewed again in December 2018 under the leadership of Saudi Arabia. The Vienna group in consensus with all the OPEC and non-OPEC countries agreed to the production cut to uphold the prices.
Due to the socio-political crisis in the states of Venezuela, it contributed only 2.3 per cent to entire world production in 2017 though it had proven reserves of 17.9 per cent. Among this, the US’s tight sanction regime on Iran in retaliation to the nuclear deal in May 2018 stirred up the oil prices. The production cuts proved to have brought a tremendous impact as the OPEC oil basket price picked up to above $ 50 per barrel in 2017 and $ 70 per barrel in 2018. The oil price market sustained with higher prices in 2019 due to the US stopping imports from Iran, and supply disruptions in Libya and Venezuela, and an attack on oil stations in Saudi. However, continued geopolitical risks, accompanied by US shale production led to price swings and uneven supply-demand gaps in 2019.
The Real Price War 2020 - Battling COVID-19 and the Oil Price
The Iranian General killing case led to an upsurge in oil prices for a while in January 2020. The BRENT Crude oil peaked at $ 69.50, the highest since September 2019. It was short-lived as the oil prices fell abruptly to about $ 58.24 by January end and further slipped to $ 53 by February in the wake of COVID-19 outbreak.
Stumbled upon with the COVID-19, the global economic activities turned down and air services to China and other COVID-inflicted countries were terminated. Saudi Arabia resorted to additional production cuts thus, on March 5, OPEC declared the production cuts of 1.5 million BPD beginning from April, which triggered multiple sell-offs. But, the OPEC ally Russia denied the production cut as it wanted to test the intensity of the situation on the oil market. Following the failure of the deal, On March 9, the WTI and the (international benchmark) BRENT Crude plunged to $31.13 per barrel and $34.36 per barrel respectively, the highest drop since 1991. The unsuccessful agreement triggered Saudi Arabia to strike back by flooding the oversupplied market through drilling oil from every possible source to slash the prices. Thus, Saudis considered luring the market procuring oil at oversized discounts for April sales.
The US found the dropping prices, favourable for consumers, while the deteriorating condition of oil companies concerned Trump, as the US Whiting Petroleum Corp. had already filed for bankruptcy. The pandemic crisis and the ongoing Saudi-Russia feud devastated the oil prices. On April 9, WTI price played along with the OPEC+ discussion on the production cut reaching highs and lows in five hours. On April 12, the US, Russia and Saudi Arabia settled with a deal to collectively reduce the production by 9.2 million barrels per day. The US was the prime deal maker as it prodded the Saudi-Russia dispute and Suadi-Mexico standoff to ease the rough patch.
The OPEC+ deal was to have production cuts by 9.7 million barrels per day in May and June 2020. Also, Saudi and Russia pointed out that the countries who have not complied fully with the April deal should tally the said production cuts and must act accordingly to future cuts. Subsequently, on June 6, the OPEC witnessing the uncertainty decided to extend the production cuts till 2022. In response to the reduction, June futures for WTI were trading positive of over $ 20 per barrel and the WTI prices rebounded and stood at $ 40 per barrel as of July 13. Though the OPEC+ have declared the production cuts for the next two years, the prices are less likely to rebound as Libyan exports, exempt from OPEC+, could impact prices and the soaring COVID-19 cases and lockdown depress the oil demand.
Definitions and Abbreviations:
OPEC - The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization created in 1960. The members are Saudi Arabia, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, UAE, Venezuela.
OPEC+ Apart from the OPEC countries, they include the Non-OPEC members viz., Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan (The Vienna Group).
Fiscal Break-Even - It is the minimum oil price per barrel that the oil-exporting country needs in order to meet its expected spending needs while balancing its budget.
BPD - Barrels Per Day.
WTI Price - West Texas Intermediate Oil price is a specific grade of crude oil and is one of the international benchmarks along with BRENT and Dubai Crude.
References:
OPEC+ Prices and Beyond: How and Why Oil Prices are high. Martin Beck. E-International Relations.
Clayton and Levi. Fiscal Break-even Oil Prices: Uses, Abuses and Opportunities for Improvement. Council on Foreign Relations. November 2015.
US: Impressions from OPEC+ June 6, 2020, Decision to maintain oil Production Cuts. Baker McKenzie. Publications. June 2020.
World Bank Blog
IMF Blog: Insights and Analysis on Economics and Finance.
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