Oil prices have rebounded impressively this year, with WTI crude oil and Brent crude oil rising by nearly 30%. However, most analysts are not optimistic about the long-term rise in oil prices. Analysts at Morgan Stanley said in a report that “the forces that led to the fall in oil prices are accumulating momentum”. The tense geopolitical situation continues. The world economic growth is likely to be dragged down by the crude oil market. The crude oil market in 2019 will also face more uncertainties.
As of mid-May, the latest oil price rise was mainly due to geopolitical influence and supply disruption stimulus. The increasingly tense situation in the Middle East and the disruption of oil supplies in Venezuela, Iran and other countries show no signs of easing in the short term. These factors will provide upward momentum for oil prices in the coming quarters.
Alejandro Barbajosa, vice president of Argus Middle East and Asia-Pacific crude oil and liquefied petroleum gas, said there were no clear signs of a fall in crude oil prices. Although Venezuela, Iran, Russia and the Middle East have their own problems, the OPEC meeting two weeks ago decided to maintain a daily reduction of 1.2 million barrels of crude oil. Therefore, the price of crude oil should not fall significantly in the future. Moreover, the United States does not hold elections until 2019, and there is no great political pressure. At present, the demand for crude oil is still very strong. Alejandro Barbajosa predicts that oil prices will not fall below $70 a barrel and that there is a high probability of keeping the range between $70 and $80 a barrel running.
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Anas Alhajji, a partner in Energy Outlook Consulting, believes that foreign exchange is one of the important factors affecting crude oil prices. At present, the price difference between different markets is in fact often a false impression caused by foreign exchange and time difference. In his speech, he pointed out that Dubai and Oman crude oil prices are denominated in US dollars, while INE is denominated in RMB. Although the three trends are highly correlated, there are still some differences on the whole, and if foreign exchange factors are taken into account, the difference between the three prices will be significantly reduced. If the time zone factor is taken into account, the difference between the three factors can be basically neglected.
With the world’s major economies generally in a weak position and the dollar remaining strong this year, Anas Alhajji believes that if the dollar continues to strengthen, oil demand will be depressed and production will increase, which will further drive down the price of crude oil. Because most of the costs of crude oil companies in the North Sea, Russia and China are paid in local currencies, but sales are priced in US dollars, the purchasing power of these crude oil producers has risen during the appreciation of US dollars, and additional revenue has stimulated oil producers to further increase their production.
With regard to the conflict between the United States and Iran, which has attracted much attention from the crude oil market, the sanctions imposed by the United States on Iran are not zero. Data show that before the sanctions, Iran’s exports were between 1.1 million and 1.3 million barrels a day, and now only 800,000 barrels a day. However, the trade embargo will inevitably affect the flow of crude oil trade. Christopher Fix, managing director of Chicago Mercantile Exchange Group and board member of Dubai Commodity Exchange, said that when a trade embargo or trade war broke out, Iran lost part of its original market, and crude oil production could not find enough outlets in a short time, producers would suffer a lot. And producers need to reorient their trade routes, which will also be accompanied by certain costs. “Oil-producing countries seek lower costs to enter other markets, resulting in imbalances in the trade market and distorting price spreads in the core market. This is the same reason that soybeans seem cheaper in Southeast Asia this year, but more expensive in North Asia, including China.
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It is worth noting that China is becoming more and more important in the global crude oil market. Christopher Fix said that the influence of the East on crude oil prices is growing. Middle East crude oil prices are increasingly related to price signals in the Far East market, especially in China, South Korea and Japan. In fact, in the past 20 years, China has become an important driving force in the world crude oil market. According to Alejandro Barbajosa, China’s crude oil demand increased dramatically in 2006, strengthening the diversity of the world’s crude oil market. China’s crude oil import surpassed that of the United States as the largest importer, which will have a far-reaching impact on the world’s geopolitics. China’s energy consumption diversity has played a very good role in stabilizing the price of crude oil. At present, the Asia-Pacific region accounts for one third of the world’s oil consumption, with a specific figure of 34%. China is undoubtedly the largest consumer in the Asia-Pacific region, and the huge demand will inevitably bring its influence on world crude oil prices.
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