The Puzzle of Oil Prices

Image: IISD Reporting Services

The price of oil is unpredictable in the best of times, but the uncertainty surrounding Iran’s oil exports and Venezuela’s economic downturn — coupled with rising oil production in the U.S. and other key markets — makes pinpointing where prices are headed a complex and uncertain endeavor.

Energy giant Total has said $100/barrel is entirely possible, and major oil traders Mercuria and Trafigura predicted in September about 2 million barrels of production per day of oil could disappear from the market, primarily because of renewed sanctions imposed on Iran led by the U.S.

Yet Goldman Sachs’ head of commodities research Jeff Currie, in an interview with S&P Global Platts published Friday, said $100/barrel is unlikely.

“We are not saying $100 oil cannot happen. It is not our base case nor do we think it’s very likely,” Currie said in the interview, noting that Iran’s exports are unlikely to be reduced to zero.

Additionally, oil giants like Saudi Arabia and Russia, are almost certainly able to up the ante, with Saudi Arabia’s Energy Minister Khalid Al-Falih telling Bloomberg that more barrels can flow “within days and weeks.”

He says the country can pump a maximum of 12.5 million barrels per day, a spare capacity of more than 2 million barrels. The U.S. Energy Information Administration, however, puts Saudi Arabia’s spare capacity at 1.4 million barrels per day.

The Organization of the Petroleum Exporting Countries (OPEC) and its non-OPEC partners could also back off of the production cuts of 1.8 million barrels per day agreed on at the end of 2016.

“There are several land mines that could yet push the market back up into dangerously high territory, and they are the same ones that we have known about for a while. The losses from Venezuela and Iran will certainly outweigh any gains from the United States,” said a Nasdaq report on prices, released on Thursday.

The report points out that inventories are large enough to ensure there will not be a physical shortage in the market, but the road might get rocky once again.

“Any unexpected supply outage, such as from Libya or Nigeria, will have an outsized impact on prices,” according to Nasdaq.

How high is too high?

The oil price crash of 2014 — in which prices fell from over $100/barrel in 2014 to under $30 by 2016 — had disastrous impacts on the oil and gas industry, with projects delayed and cancelled, oil-dependent economies facing recession and oil companies trimming down and going under.

The oil industry was clamoring for higher prices, and the OPEC-led Declaration of Cooperation, in which OPEC and non-OPEC members cooperated to eliminate 1.8 million barrels of oil per day form the market, was credited with saving the industry. Oil prices rebounded, steadily climbing. This year, the oil price for Brent crude has increased by 20 percent and is now over $80/barrel.

Last week, BP’s CEO Bob Dudley said oil prices were already too high, at $80/barrel.

“[Global] oil prices are too high and it’s unhealthy,” said Dudley, speaking at the One Young World summit in The Hague. “There’s a healthy price for oil and energy and I believe that balances producing countries and consuming countries,” he continued, according to Quartz. “In my mind, it’s somewhere between $50 and $65 a barrel. The world can live with this.”

While many oil and gas companies and economies are capitalizing on the higher oil prices to launch new projects, net energy consumers are struggling. In South Africa, for example, the high oil prices (traded in U.S. dollars) combined with depreciation of the South African Rand is a top threat to the country’s economy.

“Once the price gets to $80, it is unlikely to come down. So we must find ways of dealing with that. We must find our own oil. That is the only way. We should explore for oil,” said South Africa’s Department of Energy Deputy Director-General for Petroleum Tseliso Maqubela to Business Report.

In the world of oil prices, there is rarely a win-win scenario.