Six Factors Behind the Recent Drop in Oil Prices

The joy of oil exporters did not last long, as the price of a barrel of Brent crude oil, which had risen by eighty percent to over $52 between January and June of this year, fluctuated below $42 on Friday, July 29. This twenty percent drop, occurring in about fifty days, has once again made oil volatility newsworthy. Is the recent surge in global oil prices an unstable event, and will the downward trend in the price of this commodity continue in the coming months? The factors influencing the renewed drop in oil prices, without prioritizing any particular factor, can be outlined as follows: 1) In the first half of this year, two events in West Africa and North America led to a reduction in oil supply and strengthened the price of this commodity. In Nigeria, local rebels repeatedly sabotaged the oil facilities of Western companies operating in the country, reducing the production of this OPEC member by several hundred thousand barrels per day. In Canada, severe wildfires in Alberta damaged the country's oil production. The relative return of oil production in these two countries to normal levels has naturally increased supply, which is one reason for the drop in oil prices. 2) The renewed increase in unconventional (shale) oil production in the U.S. has also raised the risk of another increase in supply, contributing to the decline in oil prices. Following the drop in oil prices last year, some shale oil producers in the U.S. exited the scene, but with the renewed increase in prices in the first half of this year, they have resumed operations, raising U.S. oil production to over 8.5 million barrels per day. Once again, it has been proven that shale oil producers heavily influence the global oil market, as they halt their platforms when prices fall below $40 per barrel and resume operations when prices rise again. With advancements in technology and increased productivity, it is possible that shale oil production in the U.S. could even be profitable at prices around $30 per barrel. In this context, the prospect of increased oil production in the U.S. poses a permanent threat to OPEC member countries, which have lost a significant portion of their influence over the global oil market. 3) The increase in U.S. strategic oil reserves, at a level higher than anticipated, is another factor accelerating the recent drop in oil prices. This refers to the amount of oil and petroleum products that the U.S. (like other major oil consumers that are members of the International Energy Agency) stores in its reserves to cope with exceptional situations. Relying on these reserves, a large energy-consuming country can have greater maneuverability to secure its energy needs in the event of oil import disruptions or similar events. The high level of U.S. strategic oil reserves means that there is no immediate need to rebuild these reserves. The first result of this assessment is a decrease in demand, which naturally creates a more favorable environment for lowering oil prices. 4) The failure of OPEC's efforts, especially by Saudi Arabia, to 'freeze' oil production at January 2016 levels has also prevented a sustainable recovery in the global oil market. Even the participation of non-OPEC producers (especially Russia) in this effort did not yield results. In April, eighteen member and non-member countries of OPEC gathered in Qatar to achieve an oil production freeze, but their meeting ended in failure. The results of this failure become apparent after a few months. 5) Iran's return to the global oil market following the initiation of the gradual lifting of sanctions has occurred much faster than anticipated. According to the latest data released by international media, Iran's exports to four major Asian countries (China, India, Japan, and South Korea) increased by forty-seven percent in June compared to the same time last year. The same data indicate that Iran has also increased its oil exports to the Netherlands, France, and Greece. Overall, it seems that Iran has been successful in regaining its share in the global oil market. The fact that Iran's oil exports have reached their highest level in three and a half years is the most significant achievement of the JCPOA for the Islamic Republic. However, this return naturally contributes to lower prices, especially given the highly tense situation in the Middle East and the overt and covert conflicts between Iran and Saudi Arabia, making it very unlikely that Riyadh and Tehran can agree on stabilizing the oil market. The 'oil war' is indeed one of the important dimensions of the escalating conflict between the two Gulf powers. 6) In addition to all these factors, the state of the global economy is also not very favorable, especially following the June 23 referendum in the UK and the victory of supporters of the country's exit from the European Union (Brexit), leading to increasing doubts and despair. The International Monetary Fund has expressed concern about the aftershocks of this referendum, deeming it detrimental to economic growth globally, particularly in the UK and the EU. This outlook naturally impacts the global energy market as well. The fate of oil is intertwined with global economic growth, and the lack of growth prospects will naturally lower the price of this commodity. Given all these factors, how will oil prices evolve? In response to this question, it must be reiterated that predicting the price of 'black gold' is very difficult due to the dependence of this commodity on a set of economic, technological, and geopolitical variables. Current data can be used to formulate scenarios for the future, with the likelihood that none of them may materialize and an unforeseen situation may arise. Can the risk of oil prices returning to the $30 per barrel range be taken seriously? Among the recent assessments regarding the prospects of this commodity, the most pessimistic comes from analysts at Morgan Stanley. This powerful American bank predicts that, based on several variables including demand, supply, inventory of petroleum products, and macroeconomic factors, oil prices could once again drop to $35 per barrel. It seems that many other oil experts do not yet share this pessimism.