Which is prospect expecting the world oil market and which will be the winner and loser in this oil price war?
In early March, the OPEC + conference took place in the Vienna capital of Austrian, without achievement a consensus between the two key members Saudi Arabia and Russia about reducing the level of joint oil production in the bloc to 1.5 million barrels a day at least for the next half year.
The door of the conference has just closed, on March 8, Riyadh immediately announced that from the beginning of April they increase the maximum production capacity from 9.7 million barrels a day to 10-11 million barrels a day ( The current capacity of this country is 12 million barrels a day) and will reduce prices by $ 6-7 a barrel to Asian and European customers. Brent oil price in the early this year was at 65-68 USD a barrel, on March 9 dropped to 33 USD a barrel compared to 52 USD a barrel when the COVID-19 epidemic was spreading in China, it is the strongest decline since the 1991 Gulf war.
What is the prospect of expecting the world oil market? What will be the winner and loser in this oil price war?
The following analysis will provide some information to answer these questions.
World oil market
Oil is one of the special commodities that has never complied with market rules and prices do not represent the same monetary value. The entire modern economy, investment mechanism, and security support regime are built on the oil platform. Oil prices crept into the formation of the value of any type of goods and services that are circulating in the world market. The oil market is always outside the prediction zone, it is formed based on a national compromise. Therefore, no analyst can accurately predict the rise and fall of oil prices.
Historically, there was a very short period (from 1871 to 1895), oil was formed spontaneously based on oil rush (similar to the gold rush). During this period, in Pennsylvania, the drilled wells developed indiscriminately that led to many companies were bankrupted. In 1895, “Standart Oil” officially monopolized the oil market and John D. Rockefeller – the founder of Standart Oil declared that he was satisfied with the price of 2USD a barrel of crude oil and this price existed for a while period until 1973 when the United States replaced the mechanism of price formation by a cartel with the form of the trading market.
The special feature of the trading market is that prices are determined not by demand for goods but by money. Today, the level of “oil-based paper” transactions (futures contracts without the obligation to deliver real oil) accounting for 98% of the level trading of the market. Due as promised, the owner of lots of oil must only pay the difference between the price in the contract and the market price at that time. That is why this market has spawned speculators and insiders. Who is the “insider” is the one who will dominate the market. Price wars often take place between the insiders when they do not find a common voice in sharing or guaranteeing their rights, but the insiders are always nations!
If in the 1970s, due to the high demand of the market, how much oil was exploited was not enough to meet the needs, after a decade, due to the appearance of more advanced technology that allows use gas and especially nuclear power factories, it has reduced the demand for oil leading to the competition of consumer markets among countries possessing “black gold” (including the Soviet Union). During the 1970s, oil prices were always high over 100 USD a barrel, except in 1973 due to the war between Saudi Arabia, the supply of oil from this region to the US and Western Europe that was blocked and the price of oil dropped to 17.25 USD.
In early 1980, Saudi Arabia decided to regain the position of OPEC nations to maintain high oil prices. However, the profit was not harmful, the reduction in exploitation made the country lose own market in 1985. If in 1981, with the average output of 10.2 million barrels a day, the budget revenue of Saudi Arabia reached 119 billion USD, in 1984, this figure was only 36 billion and in 1985 was 26 billion USD, corresponding to the average exploitation of 4.5 million and 3.6 million barrels a day!
In June 1985, Riyadh called on OPEC members to fulfill their commitment not to violate quotas for dumping to save the situation. However, the call only seemed to drop into the air. The situation is even more gloomy. Saudi Arabia decided to sell oil at unbelievable prices. In 1985, the average price of Brent oil was 27.56 USD a barrel, in 1986 was only 14.43 USD. This country has overcome its preparatory oil war and pushed a series of other countries to a standstill, typically the Soviet Union.
In his article, the former Russian Prime Minister E. Gaidar described: “The disintegration of the Soviet Union may have been scarred since September 13, 1985. In that day, Sheikh Ahmed Zaki Yamani – Saudi Oil Minister announced that the monarchy had decided to fundamentally change their oil policy. Only 6 months later, the output of this country has quadrupled but oil prices have fallen dramatically. As a result, in that year, the Soviet Union lost about 20 billion USD, the country could hardly survive if they do not have the amount of this money”.
It can be said that the history of oil is the history of conflicts, it is even the history of wars, coups and the history of revolutions.
Shale oil and gas revolution in America
Entering the 21st century, along with the advances of science and technology, oil prices are increasing significantly to the momentum of the shale oil and gas revolution that was started by the US Government and investors to pump money massively.
The economic crisis in 2008 also coincided with the time that the shale oil industry in the US was “entering the market” and began to grow. In August 2008, the oil price was at 134.67 USD a barrel, in December of that year, it dropped to 43.43 USD a barrel, which made the growth sluggish for many years afterward: In 2008, the level of average exploitation was 1.1 million barrels a day, but it increased to 1.8 million barrels a day after 3 years.
By the end of 2010, oil prices began to rise again to the threshold of 80-90 USD a barrel and in 2011, the price is always at 110-115 USD a barrel. Oil prices continued to climb and set a record at 124.45 USD a barrel in 2012. The around $ 100 price is maintained until December 2014 helped the reel of the shale mining industry in the US the same as a revolution. The growth rate is 3 times, reaching 5.5 million barrels a day. The US government began to stop buying oil from overseas markets. Supply becomes over demand. In December 2014, oil prices reversed, dropping to 57 USD a barrel and fluctuating around this level until December 2016.
With the price of USD 35-45 a barrel, shale oil has become an attractive attraction for investors. The growth rate of the amount of money poured into this field until early 2016 was 5 times larger than the average growth rate of investments in other potentially profitable stocks in the US. Therefore, although oil prices have declined in the years 2014-2016, due to the “strained capital”, the amount of shale oil exploited in the US has increased and has now almost doubled compared to 5 years before – 9 million barrels a day! It is also noted that during this process, traditional oil production in this country remained at a staggering 4 million barrels a day.
As a rule, every decade of growth and stability, the world economy enters a new cycle of recession. Last year, one of the reasons US President D.Trump started a trade war with China and his Western allies, according to the assessment, to prevent the economy of his homeland from falling into difficulties as expected.
The domestic supply is redundant, China’s oil demand (the largest market for this product) in recent years has leveled off and shows signs of decline. The United States has two choices: The first one is to reduce domestic production to re-import partly, thereby pushing up oil prices. The second one is to pressure partners to reduce the capacity to continue to maintain their advantages for shale oil.
See the following chart to know the hypothesis that OPEC + formed in 2016 due to US pressure is grounded: