International oil prices and analysis

A brief overview on the decrease in the prices of Crude Oil and the effect on
the OPEC countries.
Group Number - 8
Rahul Gupta (14060221098)
Shreyansh Baid (14060221117)
Yash Dhagat (140601148)
Ayush Shastri (140601153)
Swarnabha Gupta
Semester IV Innovative Submission

OPEC COUNTRIES

OPEC stands for Organization of the Petroleum Exporting Countries which is

an intergovernmental organization of the major 13 petroleum-exporting
nations. It was founded in the year 1960. Its headquartered in Vienna since
1965. OPEC accounts forty percent of global oil production as well as
seventy-three percent of the known oil reserves throughout the world.
OPEC members - Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

Oil Prices over the last decade

From 2000 2008, the price of oil saw an unprecedented increase going from
under $25 per barrel to almost $150 per barrel, this accounted with the
rapidly increasing demand in the developing countries such as China and
India as well as the cutting down of production by the OPEC countries drove
the price to a record high. Shortly thereafter, the bursting of the housing
bubble in the United States of America followed by the global recession of
2008 decreased the demand for energy and sent oil and gas prices into a
free fall. By the end of 2008, the price of oil had decreased till $40. The socalled economic recovery that began in the year of 2008-2009 sent the price
of oil back over a $100 till the year 2014.
Over the last two years, oil prices have come down from around 100$ a
barrel of crude oil to a benchmark low in years. The price of both the Brent
as well as the West Texas Intermediate crude are somewhere in $27-$33 a
barrel. Oil pretty much like any other commodity derives its price from the
forces of demand and supply. Such a downfall in the price of crude oil has not
been seen since the last global recession.

Reasons

1. Strong United States Dollar The US Dollar has been at a 12-year high
against the Euro and as most of the world commodities are traded in
the USD, also the inverse relation between the USD and the commodity
prices attributes to the general fall in the price of commodities
especially the crude oil.
2. OPEC decisions The OPEC countries have denied cutting down on the
excess supply of crude oil, especially Saudi Arabia, which is a de facto
leader for the OPEC. Saudi Arabia has increased its production of the
crude oil to maintain its market share throughout the world and it is
estimated that due to the fall in the prices, Saudi Arabia is losing on
more than $300 billion this year. Members like Iran, Venezuela and
Algeria have been in favor of cutting down the supply collectively to
bring up the fallen prices. OPEC dealing with the fact that more oil will
be coming to the global market has invited Indonesia to join the OPEC
again when the cartel decides to meet next.
3. Oversupply of Crude Oil The Energy Information Administration has
reported in the year 2015, that U.S. commercial crude oil inventories
rose by 4.5 million barrels over the last estimates. U.S. crude oil
inventories are at the highest level in at least the last 80 years. Shale
oil extraction process has helped the companies to extract oil that was
considered un-viable and hence the states of North Dakota and Texas
have seen a boom in the oil industry. The United States oil production
has increased more than two-folds. Though United States does not
export oil, but domestic oil production has helped curb the imports. At
the current prices, private owners of the oil wells in the United States
are virtually working on bare minimum profit at the current crude oil
price. Countries like Russia and Brazil have also persisted their levels of
production adding to excess of supply to the oil market.
4. Declining Demand The economies of Europe as well as the Chinese
stock market collapse coupled with developing countries facing a

slowdown has contributed to the overall decrease in the demand of

crude oil. China is the worlds biggest oil imported and the devaluation
of the currency has led to a major hit in the world demand of crude oil.
The El Nino effect has also attributed to keeping the northern
hemisphere warm, dropping the seasonal demand for crude oil for
heating purposes.
5. Irans Nuclear Deal Due to the sanctions imposed on the Iranian
exports because of the impasse over the peaceful nuclear research
projects between the Islamic Republic of Iran and the IAEA, United
Nations and the whole of Western bloc. A major importer and producer
of crude oil had been out of the market for a long time as countries
boycotted in trading with Iran with the use of United States Dollars.
Hence Iran had to resort to trading with other nations (only a few) by
trading in their domestic currency at the valuation agreed upon. After
the successful nuclear talks in the year of 2015 and reaching upon a
consensus regarding the nuclear deal, the sanctions over Iran have
been lifted and slowly Iran is picking up its production as well as import
of crude oil to sustain the economic losses of the past few years. This
shall add to the worlds oversupply of the oil.
Effects
The effects of the decrease in prices of oil have been different for different
nations depending on their affiliation with OPEC in terms of a producer or a
buyer or otherwise. Big importing countries euro zone, India, and Japan are
enjoying especially big windfalls. Since this money is likely to be spent
rather, global GDP should come to a rise. The falling oil price will reduce
already-low inflation still further, and so may encourage central bankers
towards looser monetary policy as well as open spending on social security
programs allowing equitable distribution of resources to some extent. It is
cheaper for poor population this year to use oil, thus leading to savings as a
huge chunk of their expenditure is concentrated around oil.

The overall fall in the prices of crude oil will hit hard on regimes and nations
who are dependent on a high oil price to pay for costly foreign adventures
and expensive social programs. For instance, Russia and Iran.

Russia is

already hit by Western sanctions following its meddling in Ukraine and Iran
which is paying to keep the Assad regime afloat in Syria. Nigeria has been
forced to raise interest rates and devalue the naira. Venezuela looks ever
closer to defaulting on its debt if the price of oil or its share in the global oil
market doesnt go up.
American Frackers (Shale producers) are now in trouble, considering the fact,
that most of these private industries have been setup with borrowings from
the banks and a total of more than 20,000+ oil wells were constructed in
anticipation of a higher oil price. These companies are barely working on a
profit margin and hence a default or decommissioning of many oil wells
across United States would not be a surprise in the near future. States like
Alaska, North Dakota, Texas, Oklahoma and Louisiana are facing economic as
well as environmental challenges due to extensive digging of petroleum
wells and state governments easing down on the taxation and environmental
laws, permissions, safety standards etcetera to attract oil barons.
Earnings are down for companies that made record profits in recent years,
leading them to decommission more than two-thirds of their rigs and sharply
cut investment in exploration and production. Chevron, Royal Dutch Shell
and BP have all announced cuts to their payrolls to save cash. These
companies are in a far better shape than smaller and independent oil
producers, scores of smaller companies have filed for bankruptcy due to the
drastic fall in prices. A total of more than 250,000 oil workers have lost their
jobs worldwide.
RBC Capital Markets has calculated projects capable of producing more than
a half million barrels a day of oil were cancelled, delayed or shelved by OPEC
countries alone last year, and this year promises more of the same. This
shows that the even in the OPEC countries the wells, projects or explorations
that were viable to some extent in the previous years have been put on hold
due to such excess supply.

Current Scenario
For months, the market internationally has been anticipating production cuts
from the petrostates around the world. But countries are generally less
willing to cut, because doing so means giving up market share for their oil,
which might be hard to win back. By holding steady, producers can help ease
the pressure on the markets without making difficult decisions. Saudi Arabia,
which has kept production at near record levels, cannot pump much more.
Venezuela and Qatar have already been maintaining. Russia in January, the
month chosen as the high-water mark for output, produced oil at a postSoviet record of 10.88 million barrels a day. Maintaining this gusher through
the year, far from limiting supply on the global market, would allow Russian
oil companies to pump more this year than last.
On February 16th 2016, OPEC members involving Saudi Arabia, Venezuela (In
a desperate attempt to save its economy) and Qatar along with Russia
announced a plan to freeze the total output of crude oil on the current levels
to try and pull up the prices. The plan represents a reversal for Saudi Arabia
in particular. Nonetheless, if prices remain low for another year or longer,
King Salman, who assumed power in January 2015, may find it difficult to
persuade other OPEC members to keep steady against the financial strains.
As oil prices have slumped, Saudi Arabia has avoided trying to manage the
market through cuts but even a small initiative like this is a symbolic one
that the countries are ready to come down to the negotiation table to
stabilize the international oil markets rather than letting it loose like before.
The countries have said that they would only commit to this plan if the other
petrostates around the world agree reinstating how every nation is out there
for itself if a consensus is not reached. Whereas Iraq has always had a
longstanding policy of seeking to raise production regardless of the pricestabilizing policies of the Organization of the Petroleum Exporting Countries,
to which it belongs. This can be attributed to certain geo-political reasons in
terms of its old regime and regions of dispute with the ISIS, but the ball rests

in the court of Iraq and Iran in terms of whether they would adhere to the
freeze in production or go ahead with increase in production to support the
domestic turmoil or strengthen the already weakened economy due to
sanctions.
This deal could very well just lead to the maintenance of the status quo in
the OPEC nations. Surprising factor being that Russia and Saudi Arabia have
collaborated in presenting a united front to the world, the two countries have
been geopolitical rivals on many issues in the past, recently being the Syrian
Civil War, where Saudi Arabia supports the cause of the rebel forces in
toppling the incumbent Assad government and Russian Federation does
otherwise. This sudden cooperation suggest that more than 70 percent fall in
the prices of oil has created concerns in the oil producing countries
especially the four big players. A clear road map would be key to reaching a
consensus in terms of decreasing the oil production in due time to preserve
the oil prices from further going down. Even after reaching a consensus
regarding decreasing the production or imposing an embargo such as one
in the seventies, the rate of decrease in production needs to be coherent
with the time period. It is considered that the rate at which the production is
going on around the world, major cut-offs would be needed to pull up the oil
prices, therefore putting similar huge amount of investments at risk in terms
of exploration projects, oil refineries and rigs. Hence the extent of the
decision as well as the time period will be crucial to deciding the fate of
international oil prices over the coming years.
Market experts have put an estimate that oil prices would not reach the $90$100 mark before the year 2020 considering the world scenario at hand right
now.