The price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location.
As with all commodities, the oil price is determined by the balance between supply and demand. The supply of oil is dependent on geological discovery, the legal and tax framework for oil extraction, the cost of extraction, the availability and cost of technology for extraction, and the political situation in oil-producing countries. Both domestic political instability in oil producing countries and conflicts with other countries can destabilise the oil price. For example, the Iranian Revolution of 1979 led to a jump in oil prices.
The demand for oil is dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on global economic growth.
The oil price appears to be at a critical junction from which it could turn back sharply lower in the coming months or embark on a sustained rally.
Having hit a near 13-year low earlier this month of around $27 a barrel, international benchmark Brent crude has been rising over recent sessions and peaked at close to $36 in Asia overnight. The price has long since decoupled from the actual cost of production and is now dependent on whether there will be a deal to cut global supplies, which still exceed demand by at least one million barrels a day.
Speculation that such a deal is close has driven the rally of the past few sessions. Russian officials claimed to have received an offer from the Saudi Arabia-dominated Opec cartel for a coordinated production cut of five per cent and said a meeting could take place in February. But there is considerable debate that this apparent rapprochement will lead to material actions.
"We do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists' forecast," Goldman Sachs analysts wrote, in a note reported by Reuters. Goldman was last year the first to predict the oil price could drop to $20 or below – there have since been forecasts of as low as $10 a barrel.
Doubts on the deal are widespread and are based, says the Wall Street Journal, on the fact Saudi Arabia has denied being the source of the offer to Russia, as well as another Opec oil power, Iran, remaining locked in proxy wars with the Saudis and so being unlikely to participate in any agreement after re-emerging from export sanctions. This, in turn, "makes it hard for Saudi Arabia to take the lead".
On the other hand, Saudi officials have said, according to a report on state television cited by CNBC, that while it was not the source of the five per cent cut offer, it will "cooperate with other oil producers to support the oil market". Fellow member Iraq, which recently reported record oil output, will also "agree and cooperate" with any agreed cut, said its oil minister Adel Abdul Mahdi.
Finally, there is US shale production, which has remained resilient so far but many expect to fall off soon. Financing arrangements are coming to an end and the economics of the business amid the price slump are punishing, which, notwithstanding any deal, should help ease production pressure elsewhere.
All of these issues should finally come into sharper focus over the next month and the oil price will move accordingly. The pessimists still outnumber the optimists but in truth, it could yet go either way.
Excerpt: theweek.co.uk
Excerpt: theweek.co.uk
