Saudi Arabia: Market turmoil in China drives OPEC oil prices to fall to a near-twelve-year low
January 6, 2016
The downward trend in oil prices observed, particularly, since mid-2015 remained intact at the outset of the year and, on 6 January, the average price of the Organization of Petroleum Exporting Countries (OPEC) oil basket broke the psychological barrier of USD 30 per barrel. On 6 January, the OPEC oil basket price fell to USD 29.7 per barrel, which marked the lowest price since February 2004. The reading was a sizeable 21.8% lower than on the same day of the previous month and marked a sharp 36.2% drop on an annual basis.
Prices for oil started to decline in mid-June 2014 (30 June 2014: USD 118.6) due to a combination of different factors that affected both supply and demand. On the supply side, rising oil production in the United States due to massive drilling and fracking, coupled with resilient pumping among the world’s key producers, bolstered total global output. On the other hand, a protracted global economic recovery and uncertainty regarding the strength of China’s economy curved demand for oil. In 2015, this situation was exacerbated by disappointing growth in emerging markets and the successful nuclear deal between Iran and the West, which promised to increase oil supply in both the mid- and long-term.
With no decisive developments on the horizon, the decline in oil prices observed in recent days continues to be driven mainly by the same forces as in the previous two years. OPEC’s decision in December to keep pumping crude at current production levels (around 31.5 million barrels per day [mbpd]) despite a global glut and the previous daily output target of 30 mbpd represented a major setback in oil prices. Moreover, a severe correction to China’s stock markets in the first days of 2016 also exerted downward pressures on prices. Finally, rising political tensions between Iran and Saudi Arabia represented a major blow to oil prices. Although, in theory, the row between the two regional powers should send prices up, analysts believe that the conflict will not restrict supply but, on the contrary, it has the potential to boost production in an attempt by Iran and Saudi Arabia to retain (or even regain) market share.
OPEC pumped 31.7 mbpd in November, which was up from the 31.4 mbpd extracted in October. According to the latest OPEC Monthly Oil Market Report, the increase in output mainly reflected much higher production in Iraq and, to a lesser extent, in Angola and Kuwait. On the other hand, Libya, Nigeria and Saudi Arabia all recorded production declines of around 20% in the same month. The Kingdom’s oil production reached 11.13 mbpd in November, which was less than the 11.16 mbpd tallied in September.