The oil market has been the subject of huge speculation of late, with a whole host of factors driving crude to a new near four-year high, only to see the price tumble into correction territory over the past month. The sector garners huge interest for traders given the influence of politics, economics, and game theory, centred upon some of the biggest nations in the world.
Why did the prices rise?
One of the biggest factors driving the prices up was the expectation that output would be hurt through instability in the likes of Venezuela, Iraq and Iran. Venezuela has the largest oil reserves in the world, yet with the country spiraling into crisis and a continued brain drain leading to a lack of expertise, crude output has been in sharp decline. Iran on the other hand is the third-largest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC), and with the US sanctions coming into place this month, markets have been expecting to see a sharp deterioration in output from this point onwards.
Why are the prices falling?
While we have seen US President Donald Trump follow through with his pledge to restrict Iranian exports, there are significant doubts over whether this will truly dent global supply levels. Firstly, the US has been allowing concessions to certain countries, highlighting the fact that Trump sees high energy prices as being restrictive on growth. His desire for lower oil prices are likely to be a determining factor behind the somewhat looser implementation. It is worthwhile noting that the previous period of sanctions for Iran saw the country utilise the black market to get their product to customers. Thus, Iran is far from finished as a crude exporter. However, with Saudi Arabia previously promising to cover any lost output from Iran, there is a fear that despite ongoing Iranian crude production, we could see headline output fall and Saudi production rise in response.
Interestingly, this week has seen the Saudi government announce that they will reduce production by 500,000 barrels per day (bpd) in December to account for falling demand. Optimism from the market over the impact this would have has been muted at best. This table from today’s OPEC monthly report highlights the fact that OPEC output rose by 127,000 bpd in the past month alone, thus raising the chance that output cut will be swallowed up easily.