OPEC members and other states that work with the cartel have sharply cut back on their production for months now. Other unplanned and unforeseen circumstances have contributed to a drop in the world’s oil supply, as well. Supply levels are finally beginning to lag behind demand levels, the very situation that these entities have worked for so long now to achieve.
According to research by Bank of America Merrill Lynch, the oil-producing nations of the world are finally about to see prices climb to the lucrative levels of 2014 when oil cost upwards of $100 a barrel. Here are specifics on how this scenario has come to be.
The Crisis in Venezuela
Falling oil prices over the past couple of years have meant that Venezuela has had less money to pay its workers with, to pay for its supplies of oil rig spares and other consumables, and to pay oil service companies. The result has been a flight of skilled workers. Many rigs have shut down. Venezuela produced 2.3 million barrels of oil a day in 2016. By January 2018, production was at 1.6 million barrels a day. Predictably, the drop in supply has lifted oil prices.
The Crisis in Iran
The U.S. has pulled out of the nuclear deal with Iran, and imposed sanctions on the country. While the isolation of Iran doesn’t directly affect its ability to export oil, it does so in indirect ways — a country hit by sanctions usually has fewer resources at its disposal with which to maintain the complex infrastructure needed to drill for oil.
The actual process by which the U.S. pulls out of the deal and imposes sanctions can take six months, however. This means that Iranian oil exports are unlikely to be affected until November. The country is certainly expected to export as much as it can until then, and this can drop oil prices worldwide for a short period of time.
Since the EU, Russia and China continue to honor the Iranian nuclear deal, however, exports are not likely to be too greatly affected. Nevertheless, the stocks of the largest oil companies have risen tens of billions in value in anticipation of more expensive oil after the U.S. pullout.
Russia’s Anticipated Pact with Saudi Arabia
Russia has been hit with sanctions as much as Iran has, and has been looking for ways to strengthen its hand. Setting up cooperative agreements with Saudi Arabia in particular, and with OPEC in general, has been an attractive alternative to Russia the moment. Cooperative deals with the oil majors would help both entities. Both would benefit, because working with the giant oil exporter could help them set up further cutbacks and send oil prices higher. Saudi Arabia has its eye on cutbacks with a view to the positive effect that higher oil prices could have on the Aramco IPO. Both countries are expected to enter a 20-year oil alliance, one that could send oil prices up.
Do American Shale Producers Benefit?
According to Sigma Drilling Technologies, the advanced pulsation control solution company, that supplies high-tech pulsation dampening components for drilling operations, American shale producers in the Permian Basin typically receive prices that are $15 or so lower than what other oil-producing nations receive. They are constrained by the fact that they are bound to contracts that hold them to these price levels through the year 2022. A rise in oil prices, then, is not of immediate significance to American drillers. It does translate to excellent returns in the future, however, a future that drillers need to begin investing in today. The vendor of pulsation dampener and suction stabilizers, however, cautions that there is a point of diminishing returns to look out for.
Oil over $100 tends to result in gas pump prices at over $3.50, a level that usually leads to lowered demand by the consumer. The $100 level tends to be the sweet spot, and it’s the place that global oil industry is today heading for.
