Will International Oil Prices Continue to be Volatile?

India is set to enter 2019 as one of the fastest growing economies in the world with a growth rate projection by the International Monetary Fund, set at 7.4 percent and Organisation for Economic Development at 7.5 percent.¹ But such a forecast are significantly dependent on major oil producers, Russians, Saudis, and the U.S. not being able to cooperate as they look to outmaneuver each other. Yet, uncertainties and volatility are likely to remain high throughout 2019.

Since refined oil is India’s second largest export amounting to 24.1 billion USD in 2017², it is crucial that crude oil prices stabilize and be available at reasonable rates, but such a sentiment is obviously not shared by the aforementioned countries. The Saudi Aramco Initial Public Opening (IPO) which was rumoured to be put off by the King of Saudi Arabia, seems to be still on track with the Crown Prince eyeing 2021 and a valuation of two trillion USD.³ Until the IPO comes through, the Crown Prince seems to have made up his mind to ensure that oil prices need to be above 70 USD per barrel so that his ‘Vision 2030’ can bear fruit. Another reason why a higher price is needed somewhere near 75 USD per barrel is to ensure that Saudi Arabia balances its fiscal budget in 2019.⁴

The Saudis for a while have been insisting on output cuts by recently negotiating cutting off 1.2 million barrels per day for six months starting from January 2019. Meanwhile, the Russians have made it clear that they are willing to cut production but in consultation with the consumers. President Putin has made it clear that Russia is okay with 60 USD per barrel instead of the expensive prices needed for Saudi Arabia’s economic future to be stable.⁵ The negotiations might be tough as the Iraqi oil minister in the last week of October, 2018, was not in favour of cutting output but rather producing more. Iraq’ oil fields have been largely rebuilt, and the aim of the oil minister Thami Gadhban is to increase exports with output estimated to reach six million barrels a day by 2025.⁶

While OPEC and Russians are yet to make a deal on how much production should be cut, the Americans are making profits from their oil wells in the Permian basin in New Mexico even at 30 USD per barrel, which might put off the Saudi plan to maintain relatively higher prices. While President Trump wants oil prices to remain at lower levels, the new technology being utilized by pipelines companies in the US has led to output increase which was supposed to remain flat until 2020 due to pipeline constraints.⁷ The American shale boom has put the Organisation of Petroleum Exporting Countries (OPEC) in a tough position, especially as the Saudi’s and can create an alternative to continuous fixing of prices of oil by OPEC.

A resolution in the United States Senate to denounce the murder of Jamal Khashoggi and an end to U.S. military support in Yemen along with waivers to a few but essential importers of Iranian oil has put the Saudi Crown Prince’s plans in a fix.⁸ If one goes through the Saudi Vision 2030, there seems to be a genuine push towards privatization and less dependence on oil money. But to bring that about he needs to have higher oil prices for the next years. He also needs to ensure that the Saudis do not antagonise the Americans. Meanwhile, President Putin, earlier this year has already given a warning to President Trump to not meddle with oil prices and also accused him of causing the high oil prices because of America pulling out from the Joint Comprehensive Action Plan (JCPoA) and placing unilateral sanctions on Iran.⁹

Qatar too has decided to leave the Organisation from January 2019 and focus more on the production of Natural Gas. While announcing the withdrawal from the oil cartel the reaction by the former Prime Minister of Qatar was one of backing the decision and also criticising OPEC’s role on Twitter. In his words the OPEC has become useless and was detrimental to its national interests. While Qatar’s strength lies in natural gas, the post by the former Prime Minister shows his frustration regarding the Saudi-led embargo on Qatar. The decision to pull out of the cartel , some experts say that this was a business decision as Qatar’s strength lies in producing natural gas and is the biggest exporter of the same.¹⁰

The Saudi Aramco at this time is more focused on their deal with SABIC, a local petrochemical company. The buyout of 70 percent stake in SABIC would ensure billions of dollars flowing into the Saudi Public Investment Fund as petrochemical is forecast to account for half of the world’s oil demand by 2050. Aramco has signed various deals with companies to set up chemical factories alongside refineries as producing petrochemical is more profitable when energy prices fall but the Saudi Aramco does not see this as a backup, and its main focus still is to pump oil as petrochemicals do not give as much profitability compared to oil and gas.¹¹ The deal with SABIC which will be finalised in 2019 would mean that preparations for IPO will not take place anytime soon and because of this delay in the company going public, the Saudi anxiousness will remain until 2021.

As mentioned earlier, while Iraq is focused on increasing output as its infrastructure is getting upgraded, Venezuela, Libya, and Nigeria are against the cuts proposed by Saudi Arabia as their economies are constrained compared to the Russians and the Saudis. Iran too is against cutting output in light of recent re-imposition of sanctions on them by the US.¹² Venezuela itself is pumping oil at record low levels, and the pressure on the state-owned petroleum company there to clean up the environmental damages caused by callous maintenance of the infrastructure along with corruption scandals and hyperinflation that have ravaged the Venezuelan economy. The Venezuelans have also launched a crypto-currency called ‘Petro’ and is offering to sell oil at 30 per cent lesser rates using the new form of currency compared to traditional methods and modes of payment. In the light of renewed sanctions, Venezuela offered to export oil to India at a discounted price if the mode of payment is through the state-sanctioned crypto-currency, an offer which the Indian government declined.¹³ The crypto-currency market has burst, the value of a bitcoin has reached record highs and lows within two years which makes trading using this form of payment precarious.¹⁴ Venezuela also cannot afford to cut down production because of the U.S. sanctions and also a lot more is needed to be spent to upgrade oil infrastructure along with expenses to cleaning up the environmental disaster, which is going to cost a lot more than the yearly revenue of 22 billion USD (2017 earnings) by selling oil to foreign markets.

Without any consensus among the top exporters, oil prices will continue to be lower rather than reaching above 80 USD per barrel as it did it in October 2018, as oil prices have now come down below 50 USD per barrel for the first time since October 2017. The volatility is set to remain because OPEC is yet to take a call and to an extent Russia to get on board with output cut plans. With the shale boom in the US and President Trump against oil prices rising to exuberant levels it is yet to be seen as to whether the Saudis will cower to the pressure in light of the resolution passed by the US Senate, which is more symbolic rather than a punitive legislation being passed against Saudi Arabia. President Trump would need oil prices to be reasonable as the renewed sanctions on Iran, which was unilateral and has already drawn sharp criticism from the stakeholders in the JCPoA. Higher oil prices would lead to more pressure on President Trump to relax the sanctions,which explains the pressure put on OPEC, especially Saudi Arabia.

The indecision and infighting among exporters of oil, and the unpredictable domestic policies and international reactions has created anxiety in the global financial markets. Significant drops in prices will affect GDPs of all oil exporting nations and an increase in prices would mean that oil importing countries like India would have to shell out more to import for their refineries affecting the Foreign Exchange Reserves and in turn affecting domestic fuel prices and growth.

References:

1. IMF retains India FY19 growth outlook at 7.3%. (2018, October 09). Retrieved from https://economictimes.indiatimes.com/news/economy/indicators/imf-retains-india-fy19-growth-outlook-at-7-3/articleshow/66126065.cms [3]
2. Patel, A. (2018, August 23). Why Indian government exports petrol at half the price we pay. Retrieved from https://www.indiatoday.in/india/story/why-indian-government-exports-petrol-at-half-the-price-we-pay-1321786-2018-08-23 [4]
3. Saudi crown prince pledges Aramco IPO by early 2021: Bloomberg. (2018, October 05). Retrieved from https://www.reuters.com/article/us-saudi-aramco-ipo/saudi-crown-prince-pledges-aramco-ipo-by-early-2021-bloomberg-idUSKCN1MF2BA [5]
4. Lee, J. (2018, November 18). The Oil Price Is Now Controlled By Just Three Men. Retrieved from https://www.bloomberg.com/opinion/articles/2018-11-18/bin-salman-trump-and-putin-control-the-oil-price-now?fbclid=IwAR2RasbC7wa9aGjz208C7IPwJCnU384s7j9T6ioqIP0hv8v_NYm3yX4r6OI [6]
5. Bloomberg. (2018, November 30). Oil slides as Russian minister says current crude prices are fine - News for the Oil and Gas Sector. Retrieved from https://www.energyvoice.com/oilandgas/187336/oil-slides-as-russian-minister-says-current-crude-prices-are-fine/ [7]
6. Ansary, K. A., & Sabah, Z. (2018, October 25). Iraq's New Oil Minister Has a Top Priority: Pump More Oil. Retrieved from https://www.bloomberg.com/news/articles/2018-10-24/iraq-parliament-votes-in-thamir-ghadhban-as-oil-minister [8]
7. Blas, J. (2018, November 21). Texas Is About to Create OPEC's Worst Nightmare. Retrieved from https://www.bloomberg.com/news/articles/2018-11-21/opec-s-worst-nightmare-the-permian-is-about-to-pump-a-lot-more?fbclid=IwAR2iv7oktS6CxhvJ9-5VZnul3Hj6-0DVwNsZorni_tTMBzMSdMkvhpbyqI4 [9]
8. Saudi Arabia denounces U.S. Senate resolutions on Khashoggi, Yemen. (2018, December 17). Retrieved from https://www.reuters.com/article/us-saudi-khashoggi/saudi-arabia-denounces-u-s-senate-resolutions-on-khashoggi-yemen-idUSKBN1OF0W3 [10]
9. Putin says better if Trump didn't intervene in oil markets. (2018, October 03). Retrieved from https://www.reuters.com/article/us-oil-opec-russia-putin-intervent [11] ion/putin-says-better-if-trump-didnt-intervene-in-oil-markets-idUSKCN1MD1FG
10. Al Jazeera. (2018, December 03). Qatar to withdraw from OPEC in January 2019. Retrieved from https://www.aljazeera.com/news/2018/12/qatar-withdraw-opec-january-2019-181203061900372.html [12]
11. Bloomberg. (2018, October 24). Saudi Aramco reveals ambitions beyond $70bn SABIC deal. Retrieved from https://www.arabianbusiness.com/energy/406757-saudi-aramco-reveals-ambitions-beyond-70bn-sabic-deal [13]
12. Smith, G., Razzouk, N., & Motevalli, G. (2018, December 06). OPEC talks end without oil-cuts deal as Russia holds back. Retrieved from https://www.livemint.com/Industry/wQ5JPORR5Si3kNHFn0bKzO/Opec-waits-on-Russias-decision-as-it-searches-for-oil-cut-d.html [14]
13. India says no plans for oil trade with Venezuela using 'petro'... (2018, May 28). Retrieved from https://in.reuters.com/article/india-venezuela/india-says-no-plans-for-oil-trade-with-venezuela-using-petro-cryptocurrency-idINKCN1IT0ZV [15]
14. Cornish, C. (2018, August 20). What next after cryptocurrency bubble bursts? Retrieved from https://www.ft.com/content/7ed0c3b8-a1f3-11e8-85da-eeb7a9ce36e4 [16]

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