The Need to Deal with Global Oil Market Developments

  • 26 September 2015

Recent weeks have witnessed rapid developments in the world economy which has implications for the global oil markets, especially considering uncertainty in the near future. They highlight the critical situation prevailing at the moment and its possible effects on main oil producers, especially OPEC countries. They also call for steps to safeguard economies from future difficulties that may arise as a result of these developments.

A recent Goldman Sachs report on global oil prices is extremely significant. The bank lowered its estimates for the price of Brent crude in 2015 to $53.70 per barrel, and projected it to reach $49.50 per barrel in 2016, down from $62 in previous estimates. This is not the first report of its kind as key players in global oil markets have started dealing with the situation. They expect these conditions to prevail for a long time and seek ways to mitigate its negative effects.

For example, the Russian government recently discussed ways to deal with economic conditions if oil prices drop to $30 per barrel, which shows that it is determined to continue its expansive oil policy. However, developments in oil markets, manifested in increased supply and reduced demand, has created chronic oversupply and increased strategic oil reserves of main consumers. It is hence imperative for oil producers, particularly OPEC countries, to take steps to avoid the negative effects of any potential scenario in the future.

This is becoming more important with each passing day, given the vulnerability of global economic conditions, which have deteriorated significantly over recent weeks due to the setback to Chinese economy, the world’s largest energy importer and consumer. These circumstances indicate that global oil markets have reached a critical stage and point to a mismatch between supply and demand.

What is even worse is that this situation could continue for a long time and would require display of extreme prudence by key players, especially producers. Governments in these countries must come up with non-traditional methods to deal with the situation, focus on diversifying income away from oil revenues, and restructure their balance-sheets to accommodate current prices and potential future trends.