The price of Brent crude stands at about $84 per barrel, after having risen to $86 per barrel, as the November 5 deadline for imposition of US sanctions against Iran’s oil trade in the world comes closer, raising serious concerns in oil markets.
Already, a million barrels of daily Iranian oil has vanished from the international markets. However, there is no shortage. Saudi Oil Minister Khalid al-Falih said few weeks ago that markets had sufficient oil supply. He stressed that there is no oil refinery owner in the world who is looking for oil and not finding it.
However, there is a psychological factor that contributes to keeping prices in the range of $80 and it’s that a number of analysts and market dealers think OPEC member states and other oil producing countries do not have sufficient spare capacity to cater for any future increase in demand.
OPEC countries have increased production to cover the decline in Iranian exports. However, oil prices have remained volatile. IEA Executive Director Fatih Birol has said that “Oil prices are entering the red zone” from now until the end of the year but he did not specify the level they will reach. Some analysts forecast that prices may rise to $100 per barrel.
Birol believes that Saudi Arabia can increase production to around 11 million barrels a day. However, some companies like Trafigura expect the absence of 2 million barrels a day from Iranian oil and this makes a number of market dealers fear the inability of compensating this quantity.
Despite prevailing uncertainty and tensions in the region, some analysts conversely claim that oil prices might decline by the end of this year and fall to $80 or even $70 per barrel because expectations of rise in demand for oil this year has set the demand at 1.53 million barrels per day, compared to 1.46 million barrels per day in 2019. Meanwhile, oil production from non-OPEC countries is expected to reach 2 million barrels per day with major increase in US shale oil production.
This indicates rise in supply that would exceed demand, thus prices might remain in the range of $70 to $80 per barrel. This might help countries like Russia, which produces more than 11 million barrels a day, as was recently claimed by Russian President Vladimir Putin himself.
Historically, the value of the Russian ruble rises against the dollar with increase in the price of oil. Similarly, when oil prices decline, the value of the ruble falls. Putin does not want the ruble to have high value because he wants to encourage local industry in a way that promotes exports, instead of constantly depending on developing oil and gas exports.
In the beginning of 2018 when oil prices started to rise, the Russian central bank was selling dollars in order to keep the ruble weak. When sanctions were imposed on Russia and despite the increase in oil prices, the ruble remained weak. Putin said he prefers the price of oil to be in the range of $65 to $75 per barrel.
In spite of this analysis, there is uncertainty about the future of oil prices, as some analysts say that spare capacity in OPEC countries, especially in Saudi Arabia, has become limited after the Kingdom increased its production to 10.7 million barrels per day. However, Saudi circles deny this and assure us that they have the capacity to increase production in case of increased demand.
Certainly, Saudi Arabia has the largest production capacity among OPEC countries. It has historically maintained its production in the range of 1.5 million barrels a day to 2 million barrels per day. The kingdom even managed to produce 11 million barrels a day during the Gulf War.
The uncertainty about oil prices stems from psychological factors and geopolitical concerns as well as investor speculation. In the end, it should be noted that it is difficult to forecast oil price trends, in spite of sanctions on Iran approaching deadline.