Oil prices: Iran is the biggest factor

Crude oil prices have kept rising since the beginning of the year, even managing to reach record highs that were last seen in November 2014.

What is surprising is that the rise continues despite the International Monetary Fund’s (IMF) recent downgrade in the global growth forecasts for 2018 and 2019 by 0.2 percentage points to 3.7 percent.

The downgrade was attributed to disruptions in trade policies between members of the European Union (EU) over Brexit, and the ripple effects of the ongoing tariff war between the United States (US) and China.

A key factor that affects the prices is the supply of crude oil in global markets. While most of the world runs on the energy released from burning the black gold, not every country is privileged enough to find a steady supply under its crust. The Organization of the Petroleum Exporting Countries (OPEC) is responsible for about 40 percent of the world’s oil supply and 60 percent of the oil traded globally.

This imbalance in the distribution of oil means that geopolitical events play a big role in its supply and the market sentiment. Iran, the third largest supplier of oil in the OPEC countries, is set to face new round of economic sanctions from November 4 after US President Donald Trump withdrew from the 2015 nuclear accord in May.

The other factor that affects oil prices is the market sentiment. Speculation, and the use of market instruments such as hedging, lead to a spike or dip in prices. It is for this reason that oil prices hit a four-year high of $86.74 a barrel earlier in October, as the market grapples with the expected loss of Iranian exports due to the US sanctions.

If Oil Minister Dharmendra Pradhan announces in future that India has secured a waiver from the sanctions imposed by the US, it would continue purchasing crude oil from Iran. This would likely reflect as a dip in the oil prices.

Another factor weighing in on the speculations around the oil prices is the recent disappearance of Saudi journalist Jamal Khashoggi from a Saudi consulate in Istanbul. Khashoggi is a fierce critic of the Saudi Arabia’s policies and administration, with his views aired on the Washington Post’s opinion page.

Allegations made by the Turkish government of Khashoggi’s murder by the Saudi establishment soon surfaced. In light of these updates, many top executives from companies such as Google, Uber, Master Card, HSBC and Credit Suisse bailed out from an investment conference that was to take place in Riyadh.

Even International Monetary Fund (IMF) Managing Director Christine Lagarde has deferred a planned trip to the Middle East. She was reportedly “horrified” by media reports about Khashoggi’s disappearance.

The events led to a support in oil market prices amid growing US tensions with Saudi Arabia.

The rising oil price pressures from 2008 also forced countries like the US and Canada to tap into shale oil reserves through fracking. This further reduced the demand on global oil. Finally, OPEC did not intervene by cutting down its supply, as its member countries were of the consensus to produce as many barrels as possible, as reported in the Washington Post.
Brent

A rise in crude oil prices motivates the more affluent of the OPEC nations to use the rise in oil revenues to spur further growth, and commission industries to take on new projects. This sort of spending has a ripple effect on industries across borders, which reflects as gains in the market.

OPEC and its allies including Russia agreed to reduce output by 1.8 million barrels per day (bpd) from the start of 2017 with Moscow pledging to cut some 300,000 bpd.

As oil prices hit $80 per barrel in recent months and with global oil inventories shrinking fast, Saudi Arabia and Russia agreed to ease restrictions although they never said the exact levels they would target. Amid the rising geopolitical tensions, these measures should provide some relief in crude oil prices in the coming future.