The reasons behind the steep fall in oil prices in the international market are many, ranging from economic to geopolitical. While peak production of US shale oil last year created a glut in the market, putting pressure on prices, Saudi Arabia, the world’s largest oil producer, used the opportunity as a strategic weapon to reorganise the oil market.
Saudi Arabia, which produces 9.7 million barrels a day, could have reduced production to influence the oil price. But the kingdom and its Gulf allies in Opec repeatedly rejected demands from other oil producing nations to effect a cut in output. In fact, last December, Opec increased production by 140,000 barrels a day.
Strategic moves
Riyadh’s strategy was to use the glut scenario to its advantage — both from an economic and geopolitical point of view. In terms of economics: any reduction in output might affect the kingdom’s market share. It also wanted to put pressure on the US shale oil industry, which needs higher prices for sustenance.
And geopolitically, Riyadh’s key rivals — Iran and Russia — are dependent on oil revenues. Iran’s budget for last year was pegged at an oil price of $135 a barrel, while Russia’s peg was $100. In contrast, the average crude price in 2014 was $99 a barrel, which has further plunged to $52.93 so far this year. The result was a market awash with cheap oil.
Easing global glut
But this strategy had its limitations. The availability of cheap oil has led to many countries scrambling to build up a stockpile of fuel. World oil stocks rose by about 265 million barrels last year, and were expected to jump by roughly 300 million barrels in the first six months of this year. This, coupled with an obvious rise in demand, triggered by cheap prices, is making oil pricier.
The US’ shale oil production is also falling, easing the global glut. The number of drilling rigs operating in the US fell to its lowest in February since 2011, and was 35 per cent below its peak in October 2014. Besides, Saudi Arabia’s war on Yemen has also done its bit in raising oil prices. While Yemen isn't a very big producer of crude oil, it is adjacent to the Bab el-Mandeb Strait, one of the world’s main transit points for seaborne trade, and the Saudi attack had stoked fears of supply constraints. These factors have lifted crude oil prices from their recent lows.
Having fallen by more than 60 per cent since June, Brent crude is trading around $66 a barrel now. The market seems set for higher prices. But are the top producers ready to move beyond geopolitics and give prices a push?