The Barrels of All Nations

Analyst Aleksandr Frolov on how deteriorating relations between the U.S., Iran and China will change the global price of oil.

The United States Department of Energy has increased the figure forecast for the price of oil from $65.15 to $69.64 per barrel. The European Commission has also adjusted its estimates to $69.20 per barrel. Considering the deteriorating relations between the United States and Iran, as well as the difficulties in the negotiations between the U.S. and China, the average price by the end of the year could, in reality, turn out to be significantly higher.

Last September gave way to an optimistic outlook. Back then, prices exceeded $80 and were driving towards $86. But December saw a short but damaging fall to $49. Following this, growth once again returned to the market.

A series of factors exerted a positive influence on the market, one of the most important of those factors being the efforts of OPEC, which agreed to reduce production. Nevertheless, all market participants approached the annual forecast with caution. Many credible sources took a range of $50-$70 per barrel as their starting point for the coming years.

But the growth continued. From the beginning of March 2019, the price of Brent Crude did not drop lower than $65. It continued to exceed $70 for an extended period of time.

The relevant organizations began to recalculate their estimates. For example, the United States Energy Information Administration increased its prognosis at the beginning of April from $62.78 to $65.15. And at the beginning of May, this level was recalculated to $69.64.

In fact, we are seeing a purely technical action, a reflection of the current moment. Unfortunately, over the last five years, oil market conditions have changed dramatically and over a wide range. In such a situation, it is necessary to consider any forecast with a significant amount of caution. Moreover, forecasts like this one do not aim to predict the future; they simply give some kind of orientation and outline a window of opportunity.

They often serve as one of the most important foundations for making financial decisions with far-reaching consequences. Today, the United States has fallen into a sufficiently contradictory situation. It has announced the continued rapid growth of its own oil production. High prices for black gold are necessary to realize its plans. However, the government constantly demands that global producers hold them at a low level.

Following the end of the 2014-2016 crisis, which was accompanied by a sharp decline in oil production in the United States, the U.S. had a choice: begin to control the level of production or, once again, leave it to chance. The choice was made in favor of “the invisible hand of the market,” which traditionally turned out to be a hidden agenda. The growth of production in America suppressed the global market, threatening a new imbalance in supply and demand.

The faster the United States increased production, the more risks were created for the global market. And if that weren’t enough, a year ago a scandal broke out: The United States decided to leave the Iran nuclear pact. In return, Iran announced that it did not intend to sit back and do nothing, and essentially presented the remaining participants with an ultimatum, urging them to continue cooperation within the parameters of the agreement. For Iran, this means wider access to the global market and the attraction of foreign companies to projects within the country. It is highly likely that the arrival of foreign capital is of interest on its own. The wider the cooperation of European and Asian companies with Iran, the harder it is for anyone, even a strong player, to dictate its will to the country.

The intrigue in the real level of the price of black gold also brings conflict between the United States and China. China is a very interesting developing market for energy suppliers. American oil producers rely on it just as much as other players. Although the United States remains a significant net importer of oil, for a number of reasons, local companies need to increase their exports. If the Chinese market is closed to them, the U.S. oil and gas industry will begin to become fevered. This very circumstance can have a positive impact on the global oil and gas industry, removing the excess volume tossed in by the United States.

Today, the average daily oil production in the United States constitutes 12.3 million barrels. It is unlikely that the OPEC countries want to support American producers at their own expense. But at the same time, the demand for oil is growing, and the political situation is pointing towards prices increasing to a level higher than $70. So, the relevant authorities will need to change their forecasts again.