Oil prices may not rise at all

Christmas is just 16 days away.  With known chains of mall operators and flea markets offering items at a bargain, most of us are certainly on a buying spree and are taking these opportunities as the best gift this Christmas.  However, if prices should be used as barometers for this Christmas to be merry, probably, another potential increase in prices that won’t hit consumers at all should be the best Christmas gift of all.

Truth to tell, if we should single out one global commodity that has so much influence on us not only  on Christmases but throughout our lives, that should be oil.  So that, whatever direction oil prices go, we need to be always in the know.

To recall, as we welcome year 2018, the prices (West Texas Intermediate or WTI) were hovering around $60 per barrel.  It went beyond $70 towards the middle of the year, then hovered around $50 per barrel since late November until today.

Historically though, this pricing scenario has been repeated several times.  For instance, in July 3, 2008, oil prices almost breached $150 per barrel.  With such seemingly irreversible trend, oil prices reaching the $200 per barrel was then viewed as unquestionable.  The question was - when?  Contrary, however, to most expectations, oil prices dropped sharply and WTI crude was just $30.81 per barrel in December 22, 2008. This decline was due primarily to the USA’s economic situation.  Then, the USA was in dire economic crunch and the consequences of such turmoil traversed all over the globe.  Accordingly, the demand for oil substantially decreased, thus, the price decline.

The decline in prices in the second half of 2014 until 2015, however, was far different.   That time, the USA’s economy was on the rise and the demand for oil was steadily increasing.  Why then?  It was because the USA, the world’s largest consumer, has increased its own oil production and, thus, has cut oil imports substantially.  Moreover, they are already less dependent on oil imports from the Middle East.  They are now importing most of their requirements from Canada.

Furthermore, in the second half of the year 2009 and the entire year of 2010, we saw oil prices swinging between $60.00 and $90.00 per barrel.  Without much changes in the political and economic arena in 2009 when compared to 2008, people were wondering why oil prices went up to such level.  Why? The fact is, oil producing countries have different preferential prices.  Deutsche Bank, for one, in 2008, calculated how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of $95.  Russia needs about $70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about $55 a barrel.

So that, to achieve their desired prices, OPEC, being the world’s biggest cartel and where Saudi Arabia, Venezuela and Iran are members, opted for production cuts, as usual, and moved prices slowly but surely around $90.00 per barrel in 2011.  Then, in 2012, with the political turmoil prevailing in most oil producing countries in the Middle East, production was severely affected and prices breached $100.00 per barrel once again.  Then, as the USA slowly recovered, we saw prices steadily hovering around $100.00 per barrel in 2013 and most of the months in 2014.

The question now is, will the same scenario or price increases happen again this Christmas or in 2019?  Probably, no.  For one, some members of the OPEC, like Iran and Venezuela, cannot afford production cuts as their respective economies are so dependent on oil.  Furthermore, other large oil producers (like Russia) are non-OPEC members.  The reason is too simple.  If they cut production and won’t be serving their regular customers’ requirements, chances are, they will lose them to non-OPEC member countries like Russia, one of the world’s largest oil producers.  Moreover, due to current and previous economic sanctions, Venezuela and Iran will continue to produce to the max for them to also recover.

Not only that, with mutual distrust obtaining between OPEC and non-OPEC members, the supposed production cuts of 1.2 million barrels (800m and 400m for OPEC and non-OPEC members, respectively) may not happen at all.  Or if it happens, the planned volume cuts may not be implemented in full.  Therefore, oil prices may not just significantly rise at all.