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Finance

Five factors to affect oil prices in 2016 - ANALYSIS

Five factors to affect oil prices in 2016 - <span style="color: red;">ANALYSIS

02 December 2015 10:44 (UTC +04:00)

At the meeting, it is expected to pass a decision on rejoining of Indonesia the OPEC. Currently, the OPEC members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. Formally, Indonesia’s rejoining the organization should not affect the prices, but it may affect indirectly. According to some experts, Indonesia’s rejoining the OPEC may formally cause cartel to increase the quote and the quote may rise to 31 mln barrels from 30 mln per day. Indonesia quit OPEC in 2009 due to sharp reduction of oil export. But not, it’s reported that Indonesia’s rejoining the OPEC is not related to increase of export (because this fact does not exist), on the contrary, the rejoining is aiming involvement of investment technologies within the cartel. This allows Indonesia to increase the oil production. Therefore, Indonesia’s rejoining the OPEC is not the most important subject of the Vienna meeting. However, we cannot say same thing about Saudi Arabia.

According to information of some sources, there is a serious opposition against Saudi Arabia’s position within the OPEC and this opposition should appear on December 4. As is known, Saudi Arabia takes every step to keep its leading position in the world oil market recent years. These steps include sale of oil to Europe in discount, efforts to prevent decrease of quotes within the cartel. At the same time, some OPEC members don’t accept policy for reduction of oil price, because this policy reduces their oil revenues. In fact, Saudi Arabia’s tactics to compensate the loss from cheap oil with the increase of production and export are not appraised by some OPEC members. Remind that this tactic was supported a year ago. But, at that time, the oil price fell to only $100. As the hopes were not justified, the approach to the tactic of increase of oil production changed within the OPEC. Recently, Iran announces that it will try to ask Saudi Arabia to change this policy. However, there are some points here.

Firstly, we must note that world oil market is waiting for lifting of sanctions against Iran. This is fact is important because after Iran restores its right to sell unlimited oil, reduction of the quotes will be more actual. It’s clear that lifting of sanctions will increase the supply in the oil market. It’s forecasted that daily oil production will make 1 mln barrels when Iran enters the oil market. How is this figure grounded? The answer is clear – under the influence of sanctions, Iran reduced oil production only 1 mln barrels and it’s expected 1 mln barrels will be restored after lifting of sanctions. Currently, the supply exceeds demand by 1.5 mln barrel in the world market. If we add more 1 mln barrels, it’s clear how the process will influence the prices. Therefore, the only way is that OPEC should reduce quotes.

Except Iran, increase of shale oil production in the US, insufficient level of world economic growth also cause decline of oil prices. Saudi Arabia’s position supports this decline.

Let’s note one more point. So, it’s not real that the supply should be carried out by non-OPEC members. For example Russia. However, Russia struggles increase of oil production. Saudi Arabia sells oil to the Eastern Europe in discount and this makes Russia to take adequate steps. Because there is not any way to struggle for European market. Russia, which blames Saudi Arabia for conducting dumping policy, is not facing lose of European market. To prevent this threat, Russia announced discounts in oil prices to be sold to Europe. All of these processes directly influence the oil price decline. If we add Iraq’s and Libya’s plans to increase the oil production, the oil price is not expected to rise whenever.

But, what forecasts may be made on the oil prices in 2016? According to the experts of Goldman Sachs, is we add winter factor to the current situation in the oil market, the price may fall to even $20 in 2016. Russian experts already analyze the processes to be observed if the oil price falls to $30. Thereby, $20-30 level is not real. Current oil price makes $42-44.

If;

1) No agreement will not be reached within the OPEC to reduce the oil production,

2) Iran increases export to oil market,

3) Oil usage decline continues in European Union due to modernization in industrial sector,

4) And price war for European market continues between Russia and Saudi Arabia, the oil price may fall to $30, even lower.

The fifth is a soft winter factor. Among these factors, only OPEC decisions may stop the oil price decline. In spite of existing barriers, only OPEC Vienna meeting is hopeful. If an agreement on the reduction of production is reached at the meeting, oil price will rise immediately. And if even 1 mln barrels of oil are offered, its reducing influence will already be balanced. However, we assess these suppositions, we return to Saudi Arabia’s position. If we take this position into account, it’s not real that OPEC will reduce the quotes. Hope that these suppositions will not come true. Because, even current price of oil damages all exporting countries. The lower prices may be a tragedy.