Will This Cause An Oil Price Reversal?

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By Olgu Okumus 

Last Friday, oil prices surpassed $70 per barrel. With OPEC’s decision to reduce oil production, oil prices continue their rise. While Iran’s oil minister stated in early January that OPEC has no interest in prices jumping over $60 per barrel, no major changes have yet come from OPEC, and market players continue to wonder what can cause the price rise to reverse.

Some analysis, built on conventional market principles, sees the cause of this tension as ongoing conflict in the Middle East — these analysts now await a strong reaction from Russia to change trends. However, as the International Energy Agency (IEA) notes, the explanation may be more unconventional…

Since oil prices surpassed $70 per barrel on Friday, much international analysis narrows the cause to tensions in the Middle East — or more precisely, Iraq’s decision to join OPEC’s agreement to rein in output and ongoing conflict. Jabbar Ali Hussein Al-Luiebi, Iraq’s oil minister, announced his country’s decision to join OPEC’s agreement with other suppliers to rein in output until the end of 2018. “The deal should continue,” he said. “The market now is stabilizing somehow, but it’s not yet stable.”

Despite Iranian Oil Minister Bijan Namdar Zanganeh previously stating that “members of OPEC are not keen on increased brent crude prices above $60 a barrel because of shale oil,” so far no immediate policy shift came from OPEC on Friday before markets closed. Many analysts, putting the Middle East at the heart of the cause, also projected that tension and the Afrin operation might push prices up to $80 per barrel.

Thus, raising questions about the foundation of this analysis is now important. Do we need to fear? If so, who or what can stop this price hike? Answers vary upon how seriously the shale revolution is taken, as seen in two expert interviews with Bloomberg this week.

Ed Morse, Citigroup’s global head of commodities research, told Bloomberg he doesn’t know how OPEC will react, but he seemed confident regarding Russia’s reaction. He expects Russia to call for a pause in the agreement during OPEC’s summer meeting, as rising oil prices are endangering the ruble, and the Russian Central Bank is already considering an intervention.

However, the IEA’s 2017 World Energy Outlook projected that China will overtake the United States as the world’s largest oil consumer around 2030, as well as predicting the U.S. shale revolution will turn the country toward export, making the U.S. a net oil exporter by 2020. That said, the IEA estimates prices for oil will remain in the $50–70/barrel range — suggesting that, even if the U.S. does become an energy exporter (as predicted), this will not be a game-changer for the U.S. economy.

Based on that projection, in his Bloomberg interview, IEA Executive Director Fatih Birol drew attention to the fact that OPEC’s decisions today have a different nature than they did before the shale revolution. This is the new game in town, he noted.

Indeed, Birol’s comment is clear. Growing U.S. shale production will push down oil prices over the long term. The countries who did not see this happening, such as Russia, now face severe economic challenges. The time of blaming Middle East conflicts for oil price fluctuations or passively expecting a Russian reaction seems to be ending, and it’s time to begin replacing traditional energy analyses with unconventional ones.

It looks like the shale revolution — not Russian intervention or OPEC strategy — will be what ultimately causes prices to reverse.

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