Key Developments in World Oil Markets

  • 25 July 2015

Rapid developments on many economic and geopolitical fronts in recent weeks, casting a shadow over the global oil supply and demand situation, have raised questions about the future of the global oil markets. This has increased the importance of key players in the market, especially Organization of the Petroleum Exporting Countries (OPEC), as well as major oil producers outside the organization.

On the supply side, a major development has taken place on the Iranian nuclear issue. The agreement, concluded between Iran and the P5+1 countries, if observed by both the parties, will gradually open the doors for the country’s oil exports to return to global markets. This comeback may require some time but will undoubtedly result in a significant increase in the global supply of oil.

Iran, which produces about 3.6 million barrels of oil per day and consumes half of them, was able to export only 1.2 million barrels of oil per day, due to sanctions, leaving about 600,000 barrels per day as compulsory storage on the backs of oil tankers. Lifting of sanctions as part of the nuclear deal means that Iranian oil exports could increase by about 50 percent at the most on the short and mid-range. These exports may increase even more in the long run if the Iranian government implements new oil projects to increase productivity, which will inevitably impact the oil markets.

In this context, other developments associated with the global supply of oil taking place over the past few months cannot be overlooked. Developments related to increasing shale oil production in the United States and the exaggerated Russian expansion in production have caused a surge in supply and placed a lot of pressure on global oil prices. On the other hand, on the demand side, the Greece debt issue has cast a heavy shadow on the world oil markets and influenced global demand. It demonstrated the fragility of the overall economic conditions not only in Greece but in the euro zone as a whole.

Besides, other developments have had a negative impact on the demand for oil. Economic slowdown in China, the first of its kind in nearly three decades, is a critical development especially considering that the country is at present the largest energy consumer in the world. One also cannot ignore the vulnerable economic condition prevailing in the United States and Japan. All these developments have weakened the global demand for oil and raised doubts about it going forward.

It is obvious that the global oil markets are now in a critical phase and are witnessing extraordinary changes both in terms of supply and demand. This situation is likely to prevail for quite some time in the future and requires great care by the key players in the market, especially those on the supply side, mainly OPEC and the other big oil producers. We are looking at a prolonged phase of instability in oil markets, which is critical for the stability of the global economy.

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