Approximately a week ago the annual World Economic Forum (WEF) in Davos, Switzerland, was wrapped up. Some of the matters touched upon were oil prices, Iran’s sanctions lift-off, clean energy, and The Fourth Industrial Revolution.
Starting from the end of 2014, the oil price has plunged by around 70% and during the WEF, it even dropped to as low as 28 $/b. This current setting has been a worldwide concern for a while and it comes as no surprise that it was widely discussed in Davos 2016. Some of the participants even mentioned predictions regarding how the price of oil might develop. Azerbaijani President Ilham Aliyev said that $60-70 a barrel would be an optimal price for both companies and governments. Meanwhile, UAE Energy Minister Suhail Mohammed Mazroui said the fair price of oil is “somewhere in the middle” between $40 and $100.
Nevertheless, we must take into account the relief of sanctions on Iran. Due to the country’s compliance with the nuclear agreement, oil and financial sanctions have been lifted, therefore, letting Iran fully compete in the markets again. Iran has the biggest oil and gas resources in the world and it is reasonable to assume that it will try to regain its previous market share in the oil industry. Many experts argue that Irani oil output is going to increase by 500,000 b/day and would add another 500,000 b/day within seven months. All of this may add to already colossal adverse pressure on oil prices.
Furthermore, Russia and the OPEC have started to discuss an agreement on output cuts. Importantly, such an agreement would not affect prices as much as it would several years ago. The reason is that the US has increased its output quite drastically over the past few years, and its rate of oil extraction now exceeds that of the OPEC and Russia alike (14.8m, 11.7m, and 11.5m respectively). At the same time, no discussions have yet resulted in a significant move towards any formal agreement. Furthermore, the reason for why the deal will most probably not be signed are too clear: Iran, after sanctions’ lift-off, and the US can meet the major part of world demand, so the deal would hurt both contracting parties, implying a huge loss of market share. Thus, any near-term deals regarding output cuts between the OPEC and Russia seem unlikely at this point.
On the other hand, the short-term strategy is not the only thing that oil suppliers should concentrate on. In fact, numerous discussions during Davos 2016 were devoted to alternative energy’s current issues and perspectives. In particular, a campaign under the name 5 steps toward clean energy future was revealed. These five steps include diversification, storage, profitability, energy efficiency, and legal frameworks. The presence of such a campaign once again proves that transmission to clean energy is inevitable. This fact, while benign in nature and beneficial for the polar bears, is likely to have a grave impact on trade relations between suppliers and consumers of traditional energy resources.
By Reinis Novickis
Market Analyst at the Investment Fund