Oil Prices

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 Oil Prices
• The oil price generally refers to the spot price of
a barrel of benchmark crude oil.
• The major benchmark oil prices in the world are
– Brent crude oil price,
– WTI (West Texas Intermediate) crude oil price
– Dubai/Oman crude oil price.
• The different type of oil are with different density
and sulfur content, that leads to the oil price
difference.
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 Macroeconomics
of
Low Oil Prices in recent times

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 Why such Sharp Fall?
• The unexpected fall in world market prices for oil in
the second half of 2014 is comparable to two other
recent episodes: in 1986 and 2008–09.
• These real income gains should result in higher
spending and, other factors unchanged, a boost to
global growth.
• Reasons
– Unconventional Energy
– Reduced role of OPEC
– Low Financialization

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 Is OPEC losing its control in oil prices?

• First, oil inventories have accumulated over the past

few years, and these accumulated inventories are
preventing oil prices from rising quickly. Inventories
dampen the effects of sudden changes in oil supply
or demand.
• Second, while OPEC members represent a large
portion of oil production, a number of other
countries—including the U.S.—account for 58
percent of the oil production and are not part of the
OPEC agreement to reduce production.
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 Financial channels may also play a role in the
transmission of lower oil prices.
• In oil importers, higher savings—public or private—
could result in a boost to activity via lower interest
rates because of improved financial and external
positions and lower country risk premiums.
• This, in turn, would lower the cost of capital.
• Conversely, there could be significant adverse
effects on corporate balance sheets in the oil and
financial sectors, and on fiscal positions in oil
exporters.

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 Shale Gas in the US is more expensive
• According to the International Energy Agency, “it takes
approximately 2,500 wells per year to maintain
production of 1 million barrels per day in North
Dakota, while it requires about 60 wells per year to
maintain the same level of oil production in Iraq.” 
• “This is why it costs $100 to produce a barrel of oil in
the Bakken basin of North Dakota and Montana, while
producing the same barrel of oil in Saudi Arabia's
prolific Ghawar field costs in the order of $10.”

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Why has the oil price been so low?
• Several years of upward surprises in the production of unconventional oil;
• Weakening global demand; a significant shift in OPEC policy;
• Unwinding of some geopolitical risks; and
• an appreciation of the U.S. dollar.
• Although the relative importance of each factor is difficult to pin down,
OPEC’s renouncement of price support and rapid expansion of oil supply
from unconventional sources appear to have played a crucial role since mid-
2014.
• Empirical estimates also indicate that supply (much more than demand)
factors have accounted for the lion’s share of the latest plunge in oil prices.
• Although the supply capacity of relatively high-cost and flexible producers,
such as the shale oil industry in the United States, will need to adjust to lower
prices, most of the underlying factors point to lower oil prices persisting over
the medium-term, with considerable volatility in global oil markets.

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 OPEC 2014 Decision
• At its big meeting in Vienna on November 27, 2014 there was heated debate
among OPEC members about how best to respond to the drop in oil prices.
• Some countries, like Venezuela and Iran, wanted the cartel (mainly Saudi
Arabia) to cut back on production in order to prop up the price. These
countries need high prices in order to "break even" on their budgets and pay
for all the government spending they've racked up.
• On the other side of the debate was Saudi Arabia, the world's second-largest
crude oil producer, which was opposed to cutting production and seemed
willing to let prices keep dropping.
– In the 1980s, when prices fell and the Saudi Arabia tried to cut back on production to
prop them up, the result was that prices kept declining anyway and Saudi Arabia
simply lost market share. 
– Moreover, the Saudis have signaled that they can live with lower prices in the short
term. (The government has built up $750 billion in foreign-exchange reserves to
finance deficits.)
• In the end, OPEC couldn't quite agree on a response and ended up keeping
production unchanged. "We will produce 30 million barrels a day for the
next 6 months, and we will watch to see how the market behaves," said
OPEC Secretary-General Abdalla El-Badri after the meeting. 13
More Recent Trends in Oil Prices:
Why is it moving up?

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World Bank Energy Price Data (Feb 2018)

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 OPEC Nov 30, 2016 Decision
• On November 30th in Vienna, the
OPEC reached a deal to cut their oil
production by 1.2 million barrels per
day in order to raise global prices
• OPEC nations currently produce 33.7
million barrels of oil per day, total.
Under the deal, they’ll bring that
down to 32.5 million barrels per day,
with Saudi Arabia, Iraq, UAE, and
Kuwait making the biggest cuts.
• Earlier in the week, the talks nearly
deadlocked as Saudi officials tried to
convince Iraq and Iran to reduce
production — both countries have
been trying to increase oil output of
late as they emerge from war and
sanctions, respectively. But in the
end, they reached a compromise.
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 Why OPEC is trying to cut back on oil production —
after doing nothing for two years?
• The world has changed a lot over the past two years.
– US production has fallen from 9.6 million barrels per day down to 8.6 million barrels
per day amid the price crash.
– Nearly $1 trillion in oil investment worldwide has dried up.
– Iran returned to the oil market after EU and US sanctions were lifted as part of the
nuclear deal.
• Meanwhile, Saudi Arabia has been hurt badly by the price crash. The country
has already burned through more than $100 billion worth of foreign exchange
reserves and has been forced to cut social services and government salaries to
compensate for lower oil revenues, threatening stability in the kingdom.
• So the Saudis finally decided to shift their stance.
• Back in September, OPEC’s 14 members agreed to set a short-term ceiling on
their overall output between 32.5 million and 33 million barrels per day.
• The hope was that OPEC countries could boost prices and ease the pain on
their budgets without immediately triggering a massive surge in new oil
investment that would lead to another glut and crash.

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 OPEC View – Jan 2018
• The OPEC Reference Basket (ORB) rose for the sixth consecutive
month to average December at $62.06/b.
• Year-to-date (y-t-d), the ORB ended 2017 significantly higher at
$52.43/b, up by 28.6%, or $11.67/b, compared to the previous year.
• Oil prices have received wide-ranging support from production
adjustments under the Declaration of Cooperation (DoC), which
started in January last year, as well as from strong economic and
demand growth and healthy financial markets, which has helped
improve market fundamentals significantly.
• US commercial crude inventories fell by 7.4 mb in the week to 29
December, to 424.5 mb, according to data from the Energy
Information Administration (EIA). That is down 20% from peaks last
March.

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 What do you expect oil price to be in Dec
2018?

• $ 40?
• $ 50?
• $ 60?
• $ 70?

  2009 2010 2011 2012 2013 2014 2015 2016 2017

Crude Oil (petroleum), simple average
of three spot prices; Dated Brent, 62 79 104 105 104 96 51 43 50
West Texas Intermediate, and the
Dubai Fateh, US$ per barrel

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