Crude oil is fondly
called the liquid gold. However this gold does not bring smile and sparkle,
rather makes nations cry too often.
The problem with crude
is that it fluctuates too often , sometimes with a minimum amount of rationale. Countries like Saudi Arabia, and now
Russia tug at the production of crude at random, creating volatility as per
their convenience. Do you know crude is one of the most speculated commodities?
Let
us go through the reasons why the price of crude dances and makes even the
mightiest of the nations dance within its tune?
Let's take Russia. Russia
has one of the largest reserves of crude
in the world. It's National Oil
companies, Gazprom and Rosneft are
leaders in natural gas and crude exploration, production, transportation.
However, multinationals like Shell, Total
cannot independently produce oil or go for explorations
here, but have to form joint
ventures with these Russian giants. The Russian oil companies are tightly
controlled by people close to Kremlin-like
Igor Sechin. Sudden changes in regulations and excessive taxing of the oil
companies is the reason why the
multinationals have been wary of capital and infrastructure spending in oil and gas sectors
of Russia. The net result is a max output of about 11 mbd of crude oil which is
reduced or increased at the whim of
Kremlin. This creates an willful instability of crude price in the international market by Russia.
This nation controls
the huge natural gas market too, and not always at friendly terms. A few erstwhile Soviet Union countries had been
supplying natural gas to European countries, but with the introduction of the
Nord Stream pipeline, that business has been taken over by Russia. The problem
for European countries is that it's impossible for them to live without LNG and
Natural gas, and fossil fuel like coal is impossible to be used again.
But, Russia is the strongest contender of military might and
it will have no qualms in throttling the gas supply to European countries, whether
that be EU giants like Germany or less mighty
ones like Bulgaria, in case the western
world tries to sanction it for its misadventures.
This fact alone makes the natural gas market
turbulent and dance to any perceived slight disturbance in the geopolitical environment.
Other middle east
nations like Qatar, Iraq are also large
producers and exporters of natural gas, but they are also participant and
sufferers of geopolitical disturbances in middle East, Africa.They
support groups that damage gas transportation pipelines and storage facilities.
These disturbances add volatility in the price
of Natural Gas.
That’s why natural gas
market price is always at a boil.
Saudi Arabia is one of
the most prolific exporters of crude. But it uses it position to unabashedly
steamroll tension in Yemen, elbow out Iraq, regulate OPEC, and most importantly
control crude price internationally. It uses OPEC meetings to force other less
affluent members throttle or open taps of
crude oil production regulating it’s
price artificially.
To understand how
Saudi Arabia controls and lets crude price drift higher or lower, let’s check
out what it recently did.
It had taken a
decision to let price of crude depreciate
and not to decrease crude production. This brought crude down to 30 dollars per
barrel and made countries like Venezuela, Nigeria, broke. When Saudi Arabia
itself started suffering the pangs of ultra low crude price with its economy becoming
capital account deficit and welfare, infrastructure schemes getting scrapped,
it quickly changed tracks. Till now it had resisted production cuts. But such
is the power of this middle east nation
that within weeks it subjugated its fellow OPEC members to agree to production
cuts.
It colluded with Non Opec members and traditional business
opponents (in cude oil export) i.e.
Russia, to hammer out a production cut formulae that effective cut off more
than 2 mbd from the oil market. The price of oil took off and within a span of
five months, flew to 80 dollars from 35 dollars.
This is the power of Russia,
Saudi Arabia in regulating crude prices.
Iran, another giant in
crude oil export, frequently messes up
the market. It finances, trains militant
outfits in Yemen, West Africa, Palestine and Jihadi groups like Al Queda.
It's no brainer that's
its as anathema to a country like USA.
This results in
frequent sanctions from USA and EU, which have crippled Iran’s most important aspects
i.e. capital investment into new oil fields and servicing of existing
ones. It has also been barred from using
the American channels of payment. This particular step effectively cuts it from
transacting freely with any nation, as
all the International payments are done in American dollars. Before this
sanction took place, in the 2010s Iran was producing about 3.5 mbd. After
sanction was lifted in Obama era, it was
exporting about 2.5 mbd. But in the sanction by Trump, much steeper laws are in
place, which will bring down the export of Iranian crude to about 700,000
barrels from 4th November. This continuous process of sanctioning and
releasing Iran, creates heavy fluctuations in world wide crude price.
Libya is another
African country which has giant oil and gas field like Sharara. But the coalition
government created by National Accord does not have the power or resources to
regulate the extremist outfits. These terror groups damage the pipelines or set
the crude storage tankers on fire, as a sort of wager in return of supporting
their activities. Or for ransom payment. This causes the Libyan output to
frequently fluctuate and cause ripples in the market.
Nigeria is the largest
sweet oil producer in Africa. One of its famous product (from Shell) is Bonny
Light. However as in other African nations, damage of pipelines, setting inventory
terminals to fire by rogue groups are common. These not only create outages but
major fluctuations in price.
American shale oil
would have been sufficient to satisfy a large part of crude consumption.
However, crude transport pipeline shortage in West Texas, and in the storage depots
in Oklahoma and Cushing are preventing frackers and drillers from producing
more, as it is costly for them to transport it via rail and tankers rather than
pipeline. However, this issue so start getting solved from 2019 Q2 onwards.
The above mentioned
factors constitute the important ones that dramatically increase our decrease
price of crude in a short span of time.
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