Supply and Demand Play Decisive Role in the Oil Market

9 september 2015

“Even though both financial and geopolitical factors play their certain roles in the oil market it is the economics of this market ‒ supply and demand ‒ that have the decisive impact on what we are seeing,” claimed Alexander Kurdin, the Head of the Analytical Center’s Department for Strategic Studies in Energy during the round table Situation in the Oil Market: the OPEC Factor, held at the press center of the INA Rossiya Segodnya. The expert highlighted the importance of fundamental factors in the situation in the oil market that we are currently witnessing.

Price trends in recent years prove that when there is an excess of oil in the market this impacts reserves movements, especially in the US. The price falls when stocks increase. The expert pointed out that when OPEC had reduced output in 2008-2009 prices had started to recover fairly soon. And in 2009, even though the price fell to below today’s level, the market subsequently found its equilibrium level and the average price that year reached $60 per barrel. Now, the price is obviously lower, due to the fact that OPEC adopted a somewhat different policy. According to the expert, there is a clear excess oil supply in the market today, with excess production and rising reserves. Unfortunately, we do not see any constructive policy from OPEC that would give reason to believe that OPEC countries will reduce output, at the very least to keep it around 30 million barrels per day.

If the price drops to $40 per barrel this will threaten a significant decrease in output. Wood Mackenzie analysts showed in their research published at the beginning of the year that $40 per barrel is the level below which output will decline considerably and some oil enterprises will start to close or even go bust, simply because this is below their average variable cost of oil production. $60 per barrel is the level at which drilling in the US achieves stability, hence in the medium term it is a sufficiently comfortable level for investors and we can consider it as the next target level. In Mr. Kurdin’s opinion Russia can only anticipate a rise in price above that level if the market situation fundamentally changes. However, there is currently no reason to expect that in the next year or two reserves will be used up, more over Iran’s oil will come to market.

The fluctuations in the oil price and in the prices of commodities as a whole that we saw in 2008-2009 are not currently to anybody’s advantage and they threaten the long-term stability of the oil and other commodity markets

Alexander Kurdin, Head of the Department for Strategic Studies in Energy of the Analytical Center

OPEC can play a major role in using up the reserves. We need to see whether OPEC countries are capable of coming to a decision that will absorb the Iranian oil – which will come to market in the same quantities as previously. So far, unfortunately, we only see OPEC countries, specifically Saudi Arabia and Iraq, actually increasing output. So if at the start of the year OPEC’s crude oil output stood at 30.5 million barrels per day it is now at 31.5 million per day. According to the expert, this is a serious problem and it is unclear what to expect from the appearance of Iranian oil in the market. It is possible that stocks will continue to rise and, Mr. Kudrin suggests, the pressure on the oil price will remain.

“The fluctuations in the oil price and in the prices of commodities as a whole that we saw in 2008-2009 are not currently to anybody’s advantage and they threaten the long-term stability of the oil and other commodity markets,” the expert claimed. According to Mr. Kurdin, OPEC, the International Energy Agency and the G20 could combine forces in order to develop new mechanisms to stabilize raw material prices, including that of oil, as this would be to their advantage.

Concerning OPEC’s position, the expert recalled that the 2008-2009 crisis demonstrated that OPEC members can sometimes find common ground among themselves, although currently, as a result of various geopolitical tensions that may get worse, the disagreement among OPEC member states is more probable. Today, it is not obvious that the organization’s members will come to a consolidated decision. However, work is ongoing, including the Russian authorities working on building up the dialogue with both OPEC and major oil producers in order to sort out the situation, Mr. Kurdin highlighted.