Tuesday, June 25, 2019

Whither The Price Of Oil?

I do not know, which is a kind of silly way to start a post, but pretty obviously this is an opening to talk about some other matters, especially the US-Iran situation.  However, I want to point out some things  that have been on my mind.  In particular, while oil price volatility has not been super extreme recently compared to some movements in the last decade and a half, the degree of uncertainty and confusion about what is going on in the oil markets has become extreme.  This is heavily a subjective judgment based on following Oilprice.com on a daily basis, which links to several stories a day, along with what has been happening to prices themselves.  In particular what has struck me for some time has been how  frequently I see completely contradictory stories on a given day, one declaring that prices are going up  (definitely!) while another declares exactly the opposite (definitely!).  This has been happening several times a week for quite some time now.

Here is the rough history of oil prices over the last two decades roughly.  I shall quote West Texas Intermediate (WTI), but keep in mind that for the last several years the more important global price of Brent crude has generally been about $10 higher than WTI.  So, the price reached a low in the late 90s, which coincided with a booming US economy, which even got down briefly into the teens of $, although was mostly in the 20s.  This began to rise gradually with some hiccups after the turn of the millennium and reached an all time nominal peak in July 2008 of $147, which was followed by a plunge to about $30 in November four months later as the financial crash also cranked up.  The price then rose again jerkily getting up to roughly the $100-120 range by 2011 until mid-2014, when it dropped over a half year to the $30 range, rose again to nearly over $80 by late 2018, then to fall to $40 by the end of the year, then rising to over $70 by April, then to fall back to the mid-$50s today, currently wobbling around.  So, a lot of moving up and down, but not as sharply as some years  ago.

Obviously there are many things going on here.  On the demand side, aside from long run trends to greater energy efficiency, we most recently have seen slowing global economic  growth, which has what has mostly dragged the price down since April.  The supply side has been more complicated, with US production indeed now tops in the world, boosted by fracking, although that seems to be reaching limits.  Russia and OPEC have had ongoing rumbles and disputes over production cuts.  Venezuelan production has collapsed, with problems also in Libya and Nigeria, as well as the newly heightened sanctions against Iran, now aggravated by the possibility of Iran blocking the Straits of Hormuz.  Yes, the price  briefly spiked when it looked like war after the US nearly hit Iran last week, but fell back again once the pullback by Trump happened.  But this situation is clearly still very dicey, with the threat of war and possible disruption in the Strait very real.

So why are we not seeing higher prices with all these supply threats, aside  from the mildly weakening world economy. An important one is that the world is simply less reliant on the oil coming through the Strait of Hormuz compared to the past.  There are competing sources, but it is somewhere  between 20 and 30 percent of world oil production going through.  But this is a decline from the past when this reached nearly half at times.  Furthermore, as Saudi Arabia has been noisily announcing, it in particular has pipelines from the Gulf oil pools to the Red Sea.  Furthermore, while Iran almost certainly can make a big mess in the Strait, most observers think it probably cannot really close it fully, or if so, not for very long.  At worst we are probably looking at a temporary disruption, although it could well be enough to push the prices back up over $100 per barrel at least for awhile.

As I have put up many posts over past years about Iran, I shall not say too much.  They had an off and on vague nuclear weapons program dating from the 1950s, aided by the US before 1979, which was shut down totally in 2003, followed by numerous fatwas against them, although continuing the popular civilian nuclear energy program.  The JCPOA of 2015 moved Iran even further from being able to restart a nuclear weapons program, which Iran has followed, in exchange for removal of  economic sanctions.  Last may President Trump withdrew the US from that and has imposed far more severe sanctions on Iran, with these further tightened in May, with severe impacts on Iran's economy.  Iran has now declared it will technically violate the JCPOA as of July 7 unless other nations can offset the US sanctions, which now seems unlikely.  The latest following the near outbreak of war last week is that the US has added sanctions on certain Iranian leaders, while claiming a desire to negotiate with Iran.  But one of those sanctioned is iran's foreign minister, who is now not allowed to enter the US.  As Iranian leaders note, this seems to deliberately block negotiations.  This situation is simply continuing to go downhill with there being no justification for the policy of the Trump administration.

Barkley Rosser

Addendum: The current price of Brent crude in the $60 range is roughly about the target that OPEC and Russia supposedly want, not too high and not too low.  We shall see if they can keep it there.

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