What Was Behind the Recent Rise in Oil Prices?
July 18, 2018
4 Min Read
Donald Trump has recently taken aim at OPEC claiming that oil prices are too high.
This may be seen as a somewhat strange position to take, considering how many of his policies are designed to benefit fossil fuels and big oil.
He has cut funding and torn apart the Environment Protection Agency (EPA) by firing its science board and appointing a coal lobbyist who thinks we should increase greenhouse emissions as the new EPA head. Trump has also opened protected areas for drilling, implemented tariffs on solar panels and has shown his anti-science stance on a number of occasions (including him calling climate change a Chinese hoax — see below).
But how true is the President’s claim about OPEC being responsible for price increases?
If we look back to early 2016, the price of crude oil plunged to $30 per barrel. That’s a drop of over 70% from mid-2014. There were a number of factors that contributed to the fall, but in a nutshell, OPEC was ramping up production while supplies were piling up.
Initially, OPEC countries fought internally during 2016, but despite this, the talks about potentially cutting production helped oil regain value to around $45 per barrel. Then for first time since 2008, the OPEC countries (and some non-members, such as Russia) agreed to cut production.
The aim of the agreement was to reduce the oil stockpiles that had built up, causing the market to panic.
Over the past year oil prices have risen 60% and reached over $70 per barrel. This is thanks, in part, to OPEC and some non-members (now known as OPEC+) following through on their agreements to cut production.
Although OPEC have been the primary cause behind rising prices they are not the only ones that have caused recent price movements.
Venezuela, the world’s 10th largest oil producer, has seen its oil infrastructure battered by an economic crisis in the country, which could see oil output fall by a further 40% per day. President Trump has also considered imposing sanctions on the country’s oil to put pressure on President Maduro. According to one oil analyst, sanctions would be the death of the Venezuelan oil industry.
Saudi Arabia has recently agreed to increase its oil output, but the International Monetary Fund (IMF) claims the country needs crude oil at $88 per barrel in order to balance the books.
The Saudi Energy Minister also believes the global market has the capacity to absorb higher oil prices, which casts some doubt about how much they are actually willing to increase production by.
It’s no secret that the Kingdom plans to publicly list a portion of Saudi Aramco on the stock exchange. This is a state-owned oil company with an estimated value of around $2 trillion (over twice the value of Apple). Understandably, there is speculation that the Saudis are happy to push the price of oil up prior to the listing of Aramco, to benefit the value of the company.
The Kingdom has stated that they are continuing their commitment towards economic diversification, so there is a possibility that in the future they will begin to increase production again.
President Trump has also announced that he will pull the U.S out of the Iran nuclear deal after accusing Iran of having a secret nuclear program. He has said he will restore sanctions, which would include the country’s oil exports. Iran is the 4th largest oil producer in the world and sanctions on them could reduce global supply by 1%. Iran’s long term plan to increase oil production would be hindered and cause a longer-term impact on the market. The anticipation of this has also caused a jump in prices recently
OPEC+ has played its part in holding up oil prices from the lows we saw a few years ago, but president Trump’s policies have certainly fuelled the recent acceleration in the price.
Instability in the Middle East, including conflict in Libya, Iraq and Yemen, is also contributing to under-supply. This means prices may have the potential to rise further still.
This is a problem for central banks, as it is contributing to higher input costs for manufacturers and increased consumer prices. The knock-on effect of this would be a rise in inflation, which would potentially contribute to the decision to take a more aggressive route with future rate hikes.
It is clear that OPEC have obviously had an effect on the rise in oil prices, but the reasons and causes for these increases are not so straight-forward and certainly won’t be solved with a round of finger-pointing. As with most fundamental factors in the market, the issues are interrelated with many other aspects of the global economy and that makes this a particularly interesting situation to monitor, no matter what your stance is in the market.