Crude oil prices have continued to rise since the beginning of the year and have even reached record levels, most recently in November 2014.
Surprisingly, despite the recent downgrading of the International Monetary Fund (IMF) global growth forecasts for 2018 and 2019, the increase continues to increase by 0.2 percentage points to 3.7 percent.
The downgrade was due to disruptions in trade policy between members of the European Union (EU) over Brexit and the impact of the ongoing tariff war between the United States (USA) and China.
However, crude oil prices continue to rise as they are affected by various covert and overt factors that benefit the economies of the world.
A key factor influencing prices is the supply of oil on the world markets. While most of the world is powered by the energy released by the burning of black gold, not every country has the privilege of finding a steady supply under its crust. The Organization of Petroleum Exporting Countries (OPEC) accounts for around 40 percent of the global oil supply and 60 percent of the world’s oil traded.
This imbalance in oil distribution means that geopolitical events play a major role in supply and market sentiment. Iran, the third largest oil supplier in the OPEC countries, will face new economic sanctions on 4 November after US President Donald Trump resigned from the 2015 nuclear deal in May 2015.
The US states that this measure was taken in retaliation for possessing nuclear weapons in Iran and as alleged support for terrorist activities. US President Donald Trump has urged OPEC to increase production to offset a backlog of new US sanctions on Iran.
India imports nearly 80 percent of its crude oil demand and is the largest importer of oil from Iran, followed by China and Turkey.
The other factor that influences oil prices is market sentiment. Speculation and the use of market instruments such as hedging lead to price peaks or falls in prices. As a result, the oil price reached a four-year high of $ 86.74 a barrel in early October as the market struggles with the expected loss of Iranian exports due to US sanctions.
Brent crude is the benchmark for global oil prices, while the Western Texas Intermediate (WTI) crude is another benchmark for oil futures focused on North America. A difference between spot prices and future prices reflects investor sentiment.
If oil minister Dharmendra Pradhan announces in the future that India has made a waiver of the sanctions imposed by the US, it would continue to source crude oil from Iran. This would probably be reflected as a decline in oil prices.
Another factor weighing on speculation about oil prices is the disappearance of Saudi journalist Jamal Khashoggi from a Saudi consulate in Istanbul. Khashoggi is a harsh critic of Saudi Arabia’s politics and administration. His views were published on the opinion page of the Washington Post.
Soon, allegations were made by the Turkish government about the killing of Khashoggi by the Saudi establishment. With these updates, many top executives from companies such as Google, Uber, MasterCard, HSBC and Credit Suisse have withdrawn from an investment conference in Riyadh.
Even Christine Lagarde, Managing Director of the International Monetary Fund (IMF), has postponed a planned trip to the Middle East. She was reportedly “horrified” by media reports of the disappearance of Khashoggi.
The events led to support for oil prices in the face of growing US tensions with Saudi Arabia. According to a CNBC report, he has aroused the fear that Saudi Arabia could reduce its production to further increase oil prices. Of all the OPEC member states, Saudi Arabia accounts for almost 10 percent of the world’s oil supply. For example, state oil giant Saudi Aramco may overturn its weight with its public statements about oil supply, which may change prices.
How does the rise in oil prices affect the stock market?
Apart from a sharp decline in oil prices towards the end of 2014, both have followed a similar pattern. A World Bank article attributed the decline to slowing growth in emerging economies such as India, China and Russia from 2010 onwards, leading to a sharp drop in demand.
Growing oil price pressures in 2008 forced countries like the US and Canada to exploit shale oil reserves by fracking. This has further reduced the demand for global oil. Finally, OPEC did not intervene by restricting its supply, as its member states believed that they would produce as many barrels as possible, as the Washington Post reported.
An increase in crude oil prices is motivating the more prosperous of the OPEC countries to take advantage of the increase in oil revenues to generate further growth and engage the industry in new projects. This type of expenditure affects the cross-border industry, which has an impact on the market.
OPEC and its allies, including Russia, agreed to cut production by 1.8 million barrels per day (bpd) from the beginning of 2017, with Moscow pledging to commit around 300,000 bpd.
With oil prices rising to $80 a barrel in recent months and global oil reserves plummeting, Saudi Arabia and Russia agreed to ease the restrictions, though they never said what their exact values would be. In view of increasing geopolitical tensions, these measures should provide some relief for crude oil prices in the near future.