Recently, a barrel of North Sea “Brent” crude cost around 95 US dollars, which could be considered a rough average level since August. A week ago, the price of a barrel of this oil reached almost 100 dollars, so it can be said that since the last local highs, the oil price has been declining at least conditionally. Whether this will turn into a serious trend is not entirely clear at the moment, despite the not very encouraging forecasts for the development of the world economy.
The head of Rietumu banka’s asset management department Konstantīns Goluzins admits that the demand for oil is linked to economic activity, therefore, in the event of an economic slowdown, the demand for oil will also decrease, which will exert negative pressure on its price. However, on the other hand, the supply of oil is regulated by the OPEC cartel, which determines the volumes of oil production and accordingly reduces them to the expected demand, Rietumu banka expert outlines the market levers. Remember that Russia is also operating within the OPEC+ cartel, whose oil price G7 countries have agreed to set a price ceiling, meaning Russia will not be able to sell its oil above the level set by the seven developed countries. But at the same time, Russia has made it clear it will not cooperate with countries that have set a price ceiling for its oil.
Problems with the Saudis
Even with the other flagship of the world’s black gold supplies, there are known problems to achieve more attractive price levels for consumers. K. Goluzins recalls that the tension in relations between the US and Saudi Arabia after the murder of journalist Jamal Khashoggi does not suggest that there are diplomatic solutions to reduce the price. Namely, after Joe Biden’s meeting with the Crown Prince of Saudi Arabia, in which Joe Biden sought to increase oil production to reduce oil prices after the Russian invasion of Ukraine, OPEC+ countries , led by Saudi Arabia, have announced that they will reduce oil production by two million barrels per day from November this year, equivalent to about 2% of total consumption. The announcement reversed the price of oil, which hit its highest level since June this year.
However, in general, there has been a downward trend in the price of oil in recent months, although it must be said that this trend is no longer expressed too sharply. Whether prices will continue to fall after the local peak reached early last week is an open question. “It is difficult to predict the further development of events, because earlier the main factor of demand was economic activity, while the supply was controlled by OPEC+ decisions on the amount of production, but now there are many political risks that influence and change the rules of the game in the relatively “free” oil market, says representative Rietumu banka.
Russia successfully circumvents sanctions
Even CBL Asset Management’s chief investment officer Zigurds Vaikulis admits that market trends remain the same. According to him, although there is public concern about the sufficiency of oil, there are actually no problems at the moment. Which is to say, as was unfortunately to be expected, Russian oil continues to find its way to the global market. “Virtually everything that is not bought by Europe is bought by the“ friends ”of Russia, India and China,” Z. Vaikulis describes the situation. He refers to data from the “Rystad” agency according to which since the beginning of the year, Russian oil production has decreased by just 0.1 million barrels per day, which could be a percentage less than in previous positive periods. At the same time, the Middle East and the United States increased their production by two and nearly one million barrels per day, respectively.
According to Z. Vaikulias, in general, compared with December last year, the supply of oil has increased by about three million barrels per day. At the same time, according to the financial market development expert, the demand side remains weak. Crude oil consumption is said to be relatively weak not only in Western countries, but also in China. As a result, there has been an oil surplus on the market since the spring, which has even increased in recent months.
“OPEC+’s decision to cut actual production by one million barrels a day could halve this overall surplus, but it doesn’t solve the problem entirely. On the other hand, demand for less than one million barrels a day could be increased by replacing extra expensive gas with relatively cheap petroleum products in power generation.If the historical relationships we have observed hold true, with such a balance between supply and demand, oil prices should be between $80 and $90 a barrel in the next 3-4 months, about 10% less than current levels”. Vaikulis outlines the potential direction.
It’s not easy with gas
Global economic trends could contribute to a further evolution of gas prices towards more favorable price levels for consumers. The last two to three months have been favorable for falling gas prices, with gas prices now down more than two-thirds from their August highs. However, it is still about five times higher than it was last spring when the price jump began.
K. Goluzins recalls that the blackmail of Russian gas and the rigid position of Europe to replace two-thirds of Russian gas supplies have sent the price of gas skyrocketing to record levels. The task of filling gas depots without using Russian gas was accomplished by purchasing liquefied gas, with the European Union becoming the largest consumer of liquefied gas in the world.
“Because this reorientation happened in such a short period of time, it could only affect the price of gas. The collective gas economy, as well as the warm climate in Europe, has led to much lower than expected gas consumption , but more gas has been purchased than could be stored. Currently, gas depots in Europe are practically full, but ships with liquefied gas are drifting off the coast of Europe, waiting to be unloaded. Due to this situation , the price of gas on the market with immediate delivery also fell into negative territory for a while, i.e. the seller had to pay extra for gas so that it could be unloaded tomorrow,” says the representative of Rietum banka. Despite the fact that now the situation may seem even very good from the point of view of the consumer, K. Goluzins points out potential complications. “Despite the fact that now the depots are full and the ships with gas are ready to replenish it, with no deliveries of Russian gas next year, the possibility of filling the gas depots to the same level as this year is quite slim. , Russia does not have the infrastructure to sell its gas to other countries, replacing the volume purchased from European countries.On the other hand, the countries that supply liquefied gas cannot quickly build up their capacity to replace the Russian gas supplied to the ‘Europe,” explains the market specialist in detail. Therefore, according to him, the price of gas will be more influenced by economic activity and how much gas can be saved on a daily basis or replaced with other energy resources, since many countries that do not have alternative sources of gas supply compete for the liquefied gas market.
