In 2018, the oil market showed great instability, with no apparent balance between supply and demand.
One of the main factors influencing oil prices may be regional political developments, given that the Middle East supplies 70 percent of the world’s oil. In 2018, geopolitical tensions, financial developments, and supply-and-demand triggered a change in the price of oil on the global market, while US President Donald Trump’s tweets also sparked a tense atmosphere.
But 2019 is expected to see further fluctuations in the oil market. In recent months, OPEC members have not been able to reach lasting agreement, despite long days of talks, so let’s take a look at the economic situation of major producers – Saudi Arabia, Iran and Iraq.
The latest IMF report explores the developments in the oil market, saying that the economic outlook for oil-exporting countries is largely dependent on the “uncertain future” of oil prices.
The United States has meanwhile unilaterally imposed sanctions on Iran and predicted such measures would “potentially reduce Iranian oil production and exports dramatically for at least the next two years”.
The IMF predicts oil prices will continue to rise to $60 a barrel by 2023. The Organization of Petroleum Exporting Countries (OPEC) and its allies, which account for 55 percent of world oil production, have faced a challenge in their role stabilising the oil market. Saudi Arabia, which has a significant surplus capacity, could not implement the necessary production reductions to maintain oil prices at $70 per barrel.
Most OPEC members benefit from oil prices between $70 and $90 – enough to cover domestic budgets, but not so high as to drive investment in alternative fuel sources and technologies, especially renewable energy and electric vehicles.
What will happen in Middle East energy markets in 2019? What affect will any price rise/fall have on ordinary people and on regimes?
One of Tehran’s principal development goals is to achieve a production capacity of 5.7 million barrels of crude oil and gas liquids per day, with a production capacity of more than one billion and 300 million cubic metres of natural gas per day.
Exports of Iranian crude oil and gas condensate in the past round of sanctions under the former US administration dropped by about 1.2 million barrels per day over two years, but this did not have a significant impact on oil prices, as the world was facing a surplus of oil supplies between 2014 and 2016.
One of the most important factors in pricing is the state of market equilibrium in terms of the possibility of substituting oil from the market due to sanctions, oil prices and geopolitical factors. Since the reintroduction of US sanctions, Iran’s oil exports have fallen.
Although the export figures for Iranian oil are not officially announced, according to estimates from various sources, during the months of August and September 2018 Iran’s export of crude oil and gas condensates declined between 300 and 600 thousand barrels per day. According to estimates from secondary sources, in the same time, Iran’s crude oil production fell by about 450,000 barrels per day.
The US government initially announced that it would attempt to reduce Iran’s oil exports to zero by November 4, 2018, but eventually it was forced to exempt eight countries that imported oil from Iran.
However, there is likely to be a market surplus this year, and Iran’s oil exports will certainly be affected. But, if oil prices continue to decline, the likelihood of a drop in supply from OPEC and non-OPEC producers is high.
Iran under sanctions is unable to play an important role in the global oil market and cannot produce or export more oil.
Any increase in the oil price is therefore in favour of Iran. Iran had been producing about 2.5 mbpd in recent months but was expected to drop to about 1 mbpd when January 2019 figures are more fully estimated.
By October 2018, Iran had begun to sell oil in energy exchanges within the private sector to sell more on the regional market. But energy exchanges have not been as successful as expected, and Iranian oil exports will not increase. Since domestic production is in short supply, the export of goods is not affected by the exchange rate – which has a more visible and noticeable effect on Iran’s imports, as all four of Iran’s main economic sectors, agriculture, industry, oil and services, import capital goods, and intermediaries are dependent on the outside world – so rising oil prices can lead to lower prices for domestic products, or falling oil prices lead to higher prices for domestic products.
For decades, Saudi Arabia has traditionally played the role of swing producer in the oil market; a producer with enough spare capacity that can quickly change its oil production at no extra cost. But for a long time, Saudi Arabia has not played such a role: the rise in US oil production, along with a host of other factors, has led to a surplus of demand for the oil market, and as a result, oil prices have fallen.
OPEC’s expectation was to cut oil production to increase prices. At OPEC’s annual meetings, Iran, and most OPEC countries, made the same request, while Saudi Arabia and its allies offered another target that was not so wrong: protecting market share.
In October 2014, Saudi Arabia took a different policy towards the oil market and refused to reduce its crude oil production in line with maintaining oil prices, which initially caused great damage to the country’s economy.
Saudi Arabia has spent billions of dollars of its own money in order to maintain its share in the global oil market, as well as to force OPEC member and non-member countries to reduce oil production. Speculation about the fall of oil was ripe during this period: Did Saudi Arabia target Iran and Russia, or plan to reduce oil production from unconventional shale, or was there some other story?
The proposed $111.9 billion budget, sent to the Iraqi parliament in October, estimated the export of crude oil at 3.8 million barrels per day at $56 per barrel. The proposed budget will increase spending by 23 percent and a deficit of $ 22.8 billion.
This budget will not cover the country’s reconstruction after many years of war, with about 1.8 million people still yet to return to their homes. Part of Mosul, Iraq’s second city, has been destroyed, like many other cities and villages that were in the hands of IS.
The Iraqi Ministry of Planning estimates that the country needs about $88 billion to rebuild. In February 2018, donors at the Kuwait Summit promised $30 billion in loans and investment assistance to fund a portion of this budget, but little progress was made. Meanwhile, protests, unemployment and public service disruption have plagued , the southern resource-rich region in recent months.
The interruption of electricity is also a national problem in Iraq and in the south, drinking water is unclean.
The Iraqis chose their new government in early 2018, but the government is influenced by political factions similar to those that have run the country over the past 15 years. Legislators have rejected the draft budget and are demanding a new budget based on an estimate of the level of oil price closure, and more allocated funding for public investment.
While global attention is focused on the destruction caused the wars in northern and western Iraq and protests in the south, the budget crisis is also a major concern for Iraqis living in more stable regions.
Half-finished construction projects have remained at a standstill all over Baghdad for years. But after the government declared war on IS, the general budget fell. When oil prices recovered in 2017, the government began to pay instalments on construction mega-projects, but only for those that were mostly completed.
Payments are once again waiting for the outcome of budgetary negotiations. The attempt to diversify the economy has been halted by the rise of domestic political conflicts and corruption, as well as war and instability.
“Our destiny depends on oil. When the [price] goes down, our blood pressure will rise,” said one Iraqi analyst.
During the most recent period of sanctions, Kirkuk oil – along with Russian oil – became an alternative to Iranian oil because of a similar chemical profile. In 2019, Kirkuk oil’s share in Iraq oil exports is likely to increase – and this will not be good news for Iran.
As the global oil market simultaneously sees an increase in Russian, American and Saudi oil production, as well as the maintenance of the quota of Iranian oil with a slight decrease in the market, the world’s oil production rate has surpassed demand and has become one of the factors behind the fall in commodity prices.
Major oil producers will be hit by declining prices because most of the revenue of these nations comes from oil. Iran under sanctions will unable to sell more, but if prices are to rise, Iran’s damaged economy would stand to benefit.
The US decision to grant exemptions to some of Iran’s oil buyers changed the market dynamics that were already under pressure from three major manufacturers: the US, Russia and Saudi Arabia.
Non-OPEC oil production could yet increase from 1.5 to 2.2 million barrels per day in 2019, with shale being behind the rise. The sharp rise in US production will be a major hindrance to rising oil prices in 2019.
Oil demand will grow between 0.9 and 1.5 million barrels per day in 2019. This figure was between 1.1 to 1.5 million barrels per day in November’s poll. In terms of demand, the main factor is the question of how far economic growth will slow in 2019 and how much lower the demand for oil will be in the coming year.
The IMF expects to see oil prices rising in 2019, which could improve the economic conditions of the Gulf states. Given the trade and economic constraints with Tehran, the economies of Iran’s neighbours will not be subject to a re-imposition of sanctions. Oil-related sanctions against Iran do not make good business sense for foreign companies looking to make investments, and this will make the economic situation worse for Iran.
The worrying global economic downturn has furthered the negative impact of a surplus supply. China’s and India’s oil imports have not yet been enough to offset consumption in other developing countries.
Although the shale gas revolution has serious potential for increased production, and Russia has voluntarily reduced its quota over the past few years by cooperating with OPEC, now Moscow is also seeking to increase production.
However, Saudi Arabia, as the third actor in the triangle of production increases, can not, in the long run, increase production beyond its capacity, because its ability to produce a glut of oil is dependent on the Iranian oil industry failing.
Perhaps Moscow and Washington could make headway in this situation for a while, but in Riyadh that potential is basically absent. Of course, it also should be noted that although the global oil market is likely to contract as prices fall, Moscow also must slow its domestic revenues to increase its income – but this cannot be predicted within a specific time frame.