Oil prices are steadily rising and could reach $100 a barrel.
There is a big chance that growth will not stop there, said Khalid Al-Falih, Saudi Arabia’s energy minister. The reason is the continued uncertainty with the supply of black gold to the world market, which could lose up to three million barrels per day. The Saudis warn: they will not make up for these volumes.
The growth in prices is promoted by the approach of the new sanctions imposed on Iran and by the fall in the supply of several countries. Washington’s tough restrictions on Tehran, including energy exports, will come into effect on November 4. Countries that have trade relations with the Islamic Republic will face secondary measures.
Experts warn that a sharp reduction in Iranian oil exports – the Organization of the Petroleum Exporting Countries’ (OPEC) third largest oil producer – threatens the global market with serious impacts.
According to OPEC, Iran’s daily output reached 3.87 million barrels in 2017. Earlier estimates signaled that the oil market would risk losing up to 1.5 million barrels of Iranian oil per day. Now market participants fear double the volume.
However, how much Iranian oil will come out of the market exactly is an open question.
“The big unknown is how much Iranian oil will be off the market and we’ll know in about a month’s time. Then we’ll have a clearer picture of what to expect for the first quarter of next year,” PVM Oil Associates strategist Tamas Varga said to Reuters .
And the biggest producers would be able to replace the falling volumes of Iranian oil? The Saudis have already admitted that their capabilities are very limited.
“If three million barrels disappear from the market, we will not be able to recover the volume, so we will have to use oil reserves,” Al-Falih said. “We will have 12 million barrels a day, I assure you.
Russia is unlikely to make up the deficit – production is already close to the highest levels.
As noted by Iranian Oil Minister Bijan Zangeneh, neither Russia nor Saudi Arabia “have the free capacity to extract more oil to replace Iran’s supply.”
The situation is more complicated due to the conflict between the US and Saudi Arabia over the murder of journalist Jamal Khashoggi. Trump expressed dissatisfaction with the way Riyadh has been leading the case, and has not ruled out sanctions against those responsible for killing.
“The aggressive and unpredictable US policy, attempts to seize everything at once regardless of partners or own long-term interests, lead to such peak fluctuations that are not beneficial to anyone, including Russia,” commented Aleksei Mastepanov, deputy director of the Institute of Oil and Gas Problems of the Russian Academy of Sciences.
He added that price spikes destabilize the market, and “getting a lot of money in the budget in a month or two will be accompanied by a break in the next six months.”
For the economy, the peaks are not important, but the level at which prices are able to consolidate over a long period. The problem is that the expectation of US $100 per barrel is not justified by market situations – neither demand nor supply. All this is the result of Washington’s geopolitics and actions aimed at disrupting the balance of the oil market.
“The more expensive the oil, the stronger the desire to replace it. It may be shale oil, to some extent gas, to a certain extent electric cars. The higher the price, the more urgent the substitutes. Demand will decline and over time prices will be reduced,” said Sergei Khestanov, an advisor to the director general of macroeconomics at Open Broker.
The economically reasonable level of oil prices is between $65 and $80 per barrel. This level is more beneficial to the Russian economy as it encourages the development of non-primary industries and does not repeat the mistakes of the past. But little depends on Russia now.
“Unfortunately, Russia cannot influence the destabilizing processes that is unfolding at the moment. It is important to understand them and be prepared,” Mastepanov warned.
A drop in oil to $40 a barrel is also not justified by the market, but economists do not doubt that, based on US policy, this cannot be ruled out.