Oil prices have been decreasing more than 50 % since last June. When oil prices go down, it is never good news for oil suppliers. Of course, it is such a great thing for oil consumers since their purchasing power increases. A few days ago, I noticed that oil prices went up when my friend asked me why oil prices became more expensive. I did not have an answer for his question but I simply thought that it will go down again soon for several reasons.
Before I address my opinions why oil prices will never rise in short-term period, it is important to understand why oil price has risen 19 % since Wednesday. Oil prices settled at $ 53.05 per barrel, which is a highest level of price since December 31. Then why did oil price suddenly increased 19% in a situation in which Saudi Arabia, Russia and a few other oil suppliers are not trying to decrease the quantity of oil? This is because of a U.S. refinery strike, which led to an increase in oil prices due to concerns that the refineries could shut down fuel production. We cannot ignore this concern since many US shale oil producers have far higher oil producing costs compared to other oil suppliers such as Saudi Arabia and Russia. Walter Zimmerman, chief technical analyst at brokerage United-ICAP said, “When market bounce higher after a long drop, prices tend to stabilize rather than continue to rise. You don’t go from a burst bubble immediately into another bubble”. Some oil experts, however, expect that oil price already hit the bottom and now it is time to rise again. This, however, is not necessarily true when we draw a bigger picture of what is really going on in oil industries.
Russia and Saudi Arabia are the world’s largest oil producers. Although Russia loses about $2 billon dollars in revenues for every dollar fall in the price of oil, Russia has recently made a decision that they will not cut production to increase oil prices. Energy Minister Alexander Novak said, “ If we cut, the importer countries will increase their production and this will mean a loss of our niche market”. In addition, the world’s largest oil exporter, Saudi Arabia, has no intention to decrease their production in order to expand their market share. It is true that Saudi Arabia also needs oil prices to be around $85 per barrel to get profits but they amassed considerably a huge amount of reserve fund, approximately about $700 billion dollars. Thus, there is no reason for Saudi Arabia to feel pressure from falling oil prices.
As long as OPEC members, Russia and other countries negotiate to cut their production, I expect that oil price will not increase in short-term period. Among oil suppliers, it is urgent for U.S shale oil producers and Russia to find a way to increase oil prices. Otherwise, it is obvious that Saudi Arabia will have dominant power over oil industries.