Crude oil is sometimes referred to as the “blood of the earth” or the “black gold”. All the economies around the globe feed off it. All of them can be divided into 2 confronting groups: exporters and importers. The former (Saudi Arabia, Russia, Canada, Iran, Iraq etc.) need higher oil prices in order to earn more money from exporting oil while the latter need lower oil prices to consume more oil for less money.
All the above-mentioned gives a lot of space for political intrigues, which may result in the collapse of an empire (The USSR disintegrated after a major oil price collapse in the 1980s), revolutions (Libya), clashes (Bolivia, Nigeria) and wars (Kuwait, Iraq). As a result, the sensitive market of oil futures starts reacting in the opposite way.
In May 2012, Western mass media started reporting about the USA and Saudi Arabia’s conspiracy aimed at bringing down oil prices and forcing Russia, Iran and other oil exporters to their knees.
Is it true or false? Is it some inside info or bluffing?
Who Offered To Lower Oil Prices And Why?
The OPEC is for cutting oil prices. On May 3rd 2012, during the oil conference in Paris, the Secretary General of the OPEC said that the price around $110-130/b couldn’t be acceptable anymore because of its negative impact on the global demand and consumption as well as the global economy in general. He named $100/b as the perfect price for both the exporters and importers of crude oil.
Arguments. According to the Secretary General, the OPEC countries increased their production of crude oil by 0.3-0.4 barrels a day in April. Moreover, some non-OPEC countries (including Russia) increased their production as well. As a result, the global supply exceeded the global demand for the first time in many years (roughly by 0.9 million b/d, other sources report about 1.3-1.5 million b/d). Therefore, the global market of oil saw excessive supply.
Risks. In reality, not all the OPEC countries showed an increase in oil production in April-May. Moreover, the OPEC managed to boost its production mainly at the expense of Iraq, which had expanded its oil-production capacities. That is why $100/b is a breakeven point for some OPEC countries, including Iran, Algeria, Libya and… Iraq as well. However, Saudi Arabia, which is used to playing the OPEC’s first fiddle, insists on lowering the prices for the sake of the OPEC’s bright future.
Oil Prices Go Down
According to the Commodity Trading Department of , the pace of decline of May’s oil futures amazes.
Everything started in March. At Inter Continental Exchange, May’s Brent oil futures lost $1,59, thus closing at $124,12/b. At New York Mercantile Exchange, May’s WTI futures dropped $2,48 down to $105,61/b:
The decline continued in May.
Since early May, June’s WTI futures contracts (NYMEX) have lost 16%, which is the biggest decline since December 2008.
Since early 2012, crude oil prices have lost 11%.
According to the Commodity Trading Department of , the mid-term trend in the global market of crude oil is still bearish due to a number of factors:
· record-high oil inventories
· negative news from the eurozone
· stronger US Dollar
Saudi Arabia added fuel to the fire. On May 22nd, The Minister of Oil Al-Naimi reported about Saudi Arabia’s intension to increase the production of oil from 9.9 million b/d up to 12.5 million b/d in order to drop oil prices. Obviously, this statement had major consequences. Within the day, the price of Brent oil reached the local low at $123.20/b. The market was rather skeptical about Saudi Arabia’s plans. The country’s oil-production industry will have to run itself ragged in order to produce over 10 million b/d. That is why such threats only undermined Saudi Arabia’s image, thus resulting in the opposite reaction. On May 24th, July’s futures at NYMEX gained $1.79/b, nearly hitting the top.
However, on May 30th there was a sharp decline: at NYMEX, July’s futures dropped $2.94/b down, thus reaching the 7-month low at $ 87,82/b (-3.24%). July’s Brent futures at ICE declined by $3.21 down to $ 103,47/b (-3,01%), thus hitting touching the lowest level since October 2011.
Expert Opinion: Reasons Behind Oil Price Decline. Is There Some Conspiracy?
Did Saudi Arabians and Americans decide to punish their rivals? Such an opinion is widespread, especially if to consider the fact a major price decline may be devastating to some oil-exporting economies (Iran, Russia, Venezuela etc.), the national budgets of which have already been balanced with a glance at $100-120/b. Post-war Libya and Iraq may suffer as well. At the same, Saudi Arabia may survive a decline down to $80/b. That is why it has a lot of space for maneuver.
The scenario has the right to exist. However, it is more probable for the Middle East, where Saudi Arabia (the Sunnites) opposes Iran and Iraq (the Shiites). The latter do their best to destabilize the situation in Saudi Arabia and the allied states like Bahrain. In this aspect, Saudi Arabia’s efforts are explainable, especially if to take into account the fact that these efforts are backed by the USA.
That is why investors should be cautious when investing in crude oil.
Eurozone crisis. Some experts say that oil price dropped on negative news releases. Some of them came from Europe.
In particular, not so long ago, Egan-Jones Ratings Company cut Spain ’s rating for the 4th time, form «ВВ-» down to «В», with a negative forecast. The next day, the ECB declined Spain ’s plan to solve Bankia SA (€19bn).
At the same time, Italy held a bond auction, which disappointed investors.
According to the latest survey, most Greeks want to revise the financial-support agreement with the EU. This means that Athens may seriously consider the possibility of leaving the eurozone if the lenders do not compromise.
Overall decline. Oil prices declined simultaneously with other markets. The macroeconomic stats disappointed investors in May.
US crude stocks kept growing, thus contributing to the price decline.
Stronger US Dollar. The strengthening of the US Dollar also pressed oil prices.
Obviously, the mentioned factors should be taken into account. However, investors should also keep in mind that the price decline has been going on for over 2 months.
What factor can prevent the US to initiate an oil price collapse?
According to , there are at least 2 factors:
1. Higher consumption of energy around the globe (mainly at the expense of China and India).
2. Speculation (from individual traders to oil giants such as Exxon Mobile etc.)
This means the oil giants just won’t let oil prices decline below a certain level.
Crude oil and stocks show positive correlation most of the time. The intraday trading volume in the market of crude oil has increased considerably:
Market Leader and would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
In your opinion, what are the reasons for the recent oil price decline?
