Oil market: correction or growth limit?

Started from mid-2017, the oil market moved into a stable upward trend, thereby completely breaking the downward dynamics in the reduction of excess oil supply. The reason for this movement was the adoption in November 2016 of restrictions on world oil production in OPEC and a number of countries not in the cartel, such as Russia.

After that, oil showed a steady upward trend, occasionally correcting on data on increased oil production and reserves in the US, which is not limited by OPEC’s agreement to limit production.

Fig. 1. Graph of  BRENT oil cost from 2016 (blue line – dynamics of the brand WTI)

What was the result of the growth in oil production cost

After almost an annual increase in oil prices, the main brands of oil: BRENT and WTI reached a psychological mark of $ 80 per barrel. Earlier, at the beginning of 2018 the end of 2017, oil quotes were predicted at $ 100 per barrel. But no one could have imagined that the market would face the problem of too expensive oil products, which grew on the cost of oil.

For the period of oil price reduction, at the end of 2014 beginning of 2016, such branches of economy as transport, aviation and others connected with the use of oil products experienced not any growth in fuel reduction.

As a result, the main world economies faced the problem of expensive oil on the growth of the supply deficit. And the last critical drop was the decline in oil production in Venezuela and Iran due to imposed sanctions.

What did the oil market end up with?

By the end of May, 2018, major world economies were facing a rapid rise in prices for petroleum products, which gradual began to slow the growth of the economy. Oil production in the US reached a historic high of 10.5 million barrels per day, thereby approaching the world leader in Russia’s mining.

Also at the end of May, beginning of June, the US asked OPEC members to increase production. At the OPEC meeting on June 22, they will discuss the possibility of increasing quotas for oil production of 1 million barrels a day.

Prior to this, the difference between the cost of BRENT and WTI is growing almost every day. The difference between these brands exceeds $ 10 per barrel.

Fig. 2. Graph of BRENT oil  cost (blue line – dynamics of WTI brand)

What to expect next?

It was logical to expect OPEC acceptance of the new increased quotas, which would reduce the gap in value between brands and, in the long run, could even cause a resumption of the growth in the cost of oil in the growth of world consumption. Otherwise, the US will have to review sanctions against Iran, which is unlikely.

On the other hand, the precedent of entrainment of quotas casts doubt on the effectiveness of artificial regulation of world oil production, thereby throwing the oil market from extreme to extreme and pointing to the cost of oil, which can not be static or limited. As a result, the oil market again has to reach the balance of supply and demand, but already to limit the growth of oil prices.

Anton Hanzenko

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