Rising oil prices and the determinants of the rise

Rising oil prices and the determinants of the rise

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Amer Al Omran *
Since the beginning of this year, oil prices have increased again, achieving their best quarterly performance in eight years, after last year’s decline. This rise comes at a time when reports by the Energy Agency and OPEC are warning about global demand, and the reduction of the production has helped, led by the Organization of the Petroleum Exporting Countries, crude prices to rise more than 20 percent since the beginning of this year.

Many factors have led to the improvement in oil prices and contributed to the recovery of the oil market, which has seen repeated setbacks over the past year. These factors include the reduction of oil supply in world markets, supported by the agreement of OPEC and outside producers in December to reduce the production volume by one million and two hundred thousand Barrels per day, with the aim of re-consolidating oil prices and compensating for losses from the price decline in the late of the year 2018.

Also, among the factors contributing to support oil prices, Saudi Arabia’s cut was faster than agreed, which is expected to reach 500,000 barrels in the coming period, with the aim of rebalancing the market, which has seen great strife over the past five years.
The geopolitical tensions are among affecting factors which formed a strong factor in determining the direction of the oil market. Here we refer to the situation in Iran, Venezuela and Libya, and the consequences of the US sanctions on oil exports in Iran and Venezuela, which contributed to reducing the volume of oil supply , where Iran’s oil production has been the lowest since a year of 2013 , because of sanctions, which US President Donald Trump promised to increase pressure on Iranian oil exports to reach zero, which means further reduction of global supplies, as for Venezuela the sanctions on oil have contributed to a very serious decline in the country’s revenues, as well as the rise of the inflation rate to the highest levels in the world.
Trade disputes between the United States and China, weak global economic growth due to tariffs and tensions about trade protectionism that threaten the global economy for further slowing down and raised fears about the direction of oil prices.
Will this rise continue?

There is uncertainty among many observers about the possibility of continuing OPEC and independent producers’ agreement agreement. In this context , an American oil expert and author Julian Lee , in an article to Bloomberg News Agency said : “This agreement has two bases to remain steadfast – Saudi Arabia and Russia – and they represent the leaders at least in terms of the size of the groups of countries that were part of the deal to reduce production, as they pledged to bear the largest share of the reduction of production, where Saudi Arabia bears forty percent of the burden of OPEC, while Russia is supposed to bear 60 percent of the share of non-OPEC members.

According to the statement of the first month of implementation of the agreement, which is currently published, it is clear that while a party is doing what is required from it strongly, the other bear little of the burden of the Convention, which could cause future problems, according to the writer, who pointed out that Saudi Arabia reduced production more than promised In January last year.
It should be noted that this reality in the oil markets depends on the extent of commitment of the main producers in OPEC and abroad by agreement, in other words, the commitment and balance between producers to bear the consequences of the agreement is the basic criterion to judge the direction of the world oil price index in the future.

Rawabet Center for Research and Strategic Studies