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TOP 6 REASONS Why Oil Prices Are Heading Lower by Nedumadrid(m): 9:50am On Dec 14, 2015 |
short crude oil.
1. Iran Returns
Despite heavy fines by the US authorities
against anyone trading in any way with
Iran, that country has still managed to
continue oil production over the past few
years. Sanctions against Iran have existed in
various forms since the eighties when
religious fundamentalists overthrew the
West-friendly Shah of Iran and committed a
series of terrorist attacks against Western
nationals. However, sanctions ramped up to
the point of shutting Iran out of the oil
markets in January 2012
, when the US insisted that Iran cancel its
program of tests of nuclear weapons.
At the beginning of April 2015 Iran signed
an agreement to end its nuclear program
and let in international inspectors to prove
its commitment. Confirmation of Iran's
compliance will remove the biting sanctions
of 2012 and bring Iranian oil to
international markets. Despite being stymied
by US and EU sanctions, Iran is still able to
produce 2.7 million barrels per day, of which
1 million is exported. The un-exported 1.7
million barrels meet domestic demand, but a
large proportion is sent to storage.
The world currently has excess crude oil
production of roughly 2 million barrels per
day, so a cash-strapped, and slightly
embittered Iran could have immediate
impact on crude oil prices by putting its
estimate 35 million barrels of stored oil on
the market the day sanctions are lifted.
The impact of Iran's return to the market
greatly depends on how quickly they can
ramp up production. Bijan Namdar
Zangeneh, Iran's oil minister, claims that the
country could easily increase production by
1 million bpd within months of the lifting of
sanctions. That worrying figure would
increase the world's excess production by
50 per cent, which some analysts claim
would push crude oil prices down to $20
per barrel. However, other analysts are
skeptical.
Iran's production levels were at 4 million
barrels per day in 2011 before the latest
round of sanctions hit. Iran's isolation and
denial of technology and investment capital
means its oil industry has become badly
under-invested. Their ability to get back up
to former production levels could also be
blocked by OPEC, of which Iran is a member.
Nevertheless, Iran's return will prevent the
world's excess supply from being reduced
and so prices will fall.
2. Fracking is Not Going Away
Many believe that the 2014 fall in oil prices
was specifically engineered by Saudi Arabia
to knock out US oil production through
fracking
. Industry analysts estimated that heavy start
up costs and financing requirements placed
the break-even point of a fracking rig at
around a $70 per barrel price of crude oil
. Many saw the slump in the price of crude
down to $60 and then to the $50 mark as a
significant factor.
Sure enough, the rig count in the USA
plummeted from 1,608 in October 2014 to
747 in April 2015. Seemingly, the lower oil
price had squeezed out US oil production in
the higher-cost fracking sector. However,
the advancement of technology and the
agility of fracking producers resulted in
higher output from fewer rigs. In October
2014, the USA produced just under 9 million
barrels per day. In April 2015, that output
had increased to just under 9.5 million
barrels per day.
Chinese oil production through fracking has
risen to the same extent as USA production,
with companies in both countries adopting
and improving the same technology. In a
world with an excess production of 2
million barrels per day, America's increased
production means that oil prices are not
about to rise. China's increases compound
that situation.
3. OPEC is Idle
Previous oil price falls have been keenly
countered by OPEC, the cartel of oil
producing nations, centered mainly on
Middle Eastern producers. Whenever oil
prices fall, OPEC cuts quotas to its members,
limiting their production and causing the
price to rise through reduced output.
Saudi Arabia is by far the biggest producer
in the OPEC club and the opinion of its oil
minister, pretty much rules the actions of
OPEC. If OPEC members decide to cut their
production, but Saudi Arabia refuses to play
ball, the resolution to cut would have no
impact on oil prices, and thus be a worthless
exercise.
Fracking started to provide the USA with a
means of achieving energy independence
. The country has already become a net
exporter of gas, and similar performance in
oil production would remove the USA's
dependence on the Middle East for its oil
supplies
. Saudi Arabia's dominance of American oil
supply enables them to entice the USA to
deploy its military in the Persian Gulf at the
direction of Saudi foreign policy. The Saudis
want to return to the days of US
dependence on Arabian oil and so refuse to
cut their production in the face of falling
prices.
Despite the apparent failure of the Saudi
production tactic, OPEC shows no signs of
changing its policy. The Saudis seem to be
determined to continue forcing the price of
crude down to squeeze out US production,
but as fracking gets cheaper, output will
continue to expand and the price of crude
oil will continue to fall.
4. Russia Produces More
Political analyst point out that oil prices fell
dramatically around the time that Russia
invaded the Ukraine and the EU dithered
over imposing the sanctions that the USA
demanded. Although Europe did eventually
go along with the policy of punishing Russia
through trade restrictions, their reluctance
to really hit hard has undermined US
strategy.
Eyeing the success of an embargo on oil
sales in bringing Iran to the negotiating
table, the US administration, the theory goes,
decided to depress the price of oil in order
to bankrupt Russia and force it to cancel
plans to take over the Ukraine. The Russian
economy is overwhelmingly dependent on
oil and gas exports
, because it has little successful industry and
is unable to match the West in the
development of technology.
Saudi Arabia also has a cause to complain
about Vladimir Putin's behavior. The Saudis
loathe Bashar Assad, the President of Syria
and want to see him overthrown. American
and European governments seemed willing
to play along with this policy until the
Russians threw their support behind Assad
and European determination folded. Without
any significant allies to share the burden,
the USA cancelled their planned invasion of
Syria. The infuriated Saudis decided to take
matters into their own hands and collapsed
the price of oil with the intention of
punishing Russia, not US frackers.
Vladimir Putin and his administration have
complained loudly and frequently that the oil
price fall was deliberately aimed at attacking
the Russian economy. However, the
steadfast determination of unrealistic
quotas haunts the Russian mentality as an
overhang of the Communist era. Putin needs
money to continue his glorious and
domestically popular policy of reassembling
the Russian Empire. The Russians refuse to
bend to market forces
and so have made up the shortfall in their
budget caused by falling oil prices by
pumping out more oil. The Russian need for
income means they are unlikely to make a
tactical cut in oil output. Increased
production adds to the downward pressure
on crude oil prices.
5. ISIL's Days are Numbered
The Islamic State of Iraq and the Levant are
said to be causing havoc with oil production
in the Middle East. ISIL, originally called "the
Islamic State of Iraq and Syria," first came to
the world's attention when they threatened
takeover of northern Iraq and Syria in the
autumn of 2014 – just after the USA
declared they would not intervene in Syria to
overthrow its president.
Oil analysts talk up the oil price by warnings
over ISIL's actions. However, the
revolutionaries only managed to grab a
small portion of Iraq's oil wells and actually
increased production of their new assets in
order to fund their cause. The ISIL
bogeyman delayed the fall in oil prices
by about a month and the havoc they have
wrought across the Middle East has since
failed to block that overproduction of 2
million bpd.
ISIL's greatest success in wrecking an oil
producing country came in Libya, where
they apply different tactics to the oil
industry. Rather than profiting from Libya's
oil wells, ISIL has been destroying them, thus
knocking out a major oil producing nation.
Simultaneous increases in production in the
USA, China and Russia, however, mean that
the loss of Libyan output has had no impact
on the glut of crude oil in the world. The
panic pricing in the oil markets that the
group's initial appearance caused has
withered away.
Europe's willingness to turn a blind eye to
ISIL's activities in Libya came to an abrupt
end in mid-April. Deciding to knock out oil
production, rather than profit from it, ISIL
turned to Libya's other money maker –
people smuggling. The short distance
between the Libyan coastline and the Italian
island of Lampedusa makes the former slave
trading ports of Libya ideal routes for illegal
immigrants to sneak into the EU.
Unfortunately, the greed and carelessness of
the smugglers has resulted in overloaded
ships sinking in the middle of the
Mediterranean.
The death toll through drowning of ISIL's
passengers has reached headline-grabbing
levels and Europe's major military powers
have resolved to put an end to the
organization's activities. Although the
smuggling gangs are the proposed targets
of European airstrikes, the difficulty of
identifying those activists means that
Europe will have to restore a legitimate
government to Libya in order to stop human
trafficking.
It is significant that the proposed European
strategy is to join Egyptian military efforts.
The Egyptians have been routinely bombing
ISIL in Libya since February. ISIL is easier to
attack than other terrorist groups. With a
standing army, rather than a terrorist cell
structure, such as that of Al Qaeda, ISIL is
more visible, and so can be engaged by a
traditional military response. Its system of
local governors and administrators require
offices and infrastructure that are fixed and
easy to bomb. The imminent defeat of ISIL in
Libya means the oil industry there will be
able to rebuild, the world's oil production
excess will increase and crude oil prices will
fall further.
6. No Demand
The excess supply in the oil market could
easily be mopped up by increased demand.
However, there is no great leap in growth
expected in the world for the next couple of
years. Energy efficiency and investment in
renewable energy, such as solar, has
permanently reduced demand for oil in most
of the developed world.
Both the Federal Reserve and the People's
Bank of China have announced they are
ending their loose monetary policies. This
free money pumped around the world
inflated the prices of property, stocks, bonds
and commodities. Part of the reason the oil
price rose through 2013 and early 2014
was simply that the excessive amount of
dollars in circulation had to be invested in
something. Now that money has to be paid
back, the asset price inflation of the past
two years will be reversed. |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by Figger(m): 9:57am On Dec 14, 2015 |
First to comment, yesss!!!! |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by tos4u(m): 10:02am On Dec 14, 2015 |
Tell that to Mr Tourist Buhari, He should just sit down at home once and diversify the economy, b4 people like Atiku, OBJ and d like start offering money to buy Nigeria |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by tos4u(m): 10:02am On Dec 14, 2015 |
Ok, Tell that to Mr Tourist Buhari, He should just sit down at home once and diversify the economy, b4 people like Atiku, OBJ and d like start offering money to buy Nigeria |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by Nobody: 10:39am On Dec 14, 2015 |
Educative |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by datola: 10:39am On Dec 14, 2015 |
Good article/points badly written. |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by Nedumadrid(m): 10:51am On Dec 14, 2015 |
Preshi123:hmmmmm...dats nt hw i wrote it |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by Nedumadrid(m): 10:53am On Dec 14, 2015 |
datola:i tabled the 6 points in details,i was surprised to see it jam-packed.... |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by lionness(f): 10:55am On Dec 14, 2015 |
ok |
Re: TOP 6 REASONS Why Oil Prices Are Heading Lower by lionness(f): 11:02am On Dec 14, 2015 |
The Iranian deal is going to be beheaded once a new government is in place. Not with the powerful Jewish influence on Washington. ISIS oil to Turkey is a kowtow between the countries with the agreement of CIA, a republican wont allow this. The oil market is currently down because Obama doesnt really care about this ISIS issue. Terrorism isnt Obama cup of tea...as long as his country aint bombed. I've never seen such a puss***as$ president who is afraid of playing the roles of his predecessors. I cant wait for another cowboy to get into the WH. Trump will be a great leader who will get his hands dirty if necessary. 2 Likes |
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