There are two different groups of buyers for oil: the users and speculators. The former represent only 20% of the total handled and buy it for various management reasons. These are airlines, energy companies or refining companies that produce derivatives such as diesel.
- speculators, on the contrary, they don't see the physical barrel either. They will sell it days, weeks, months later, and hopefully at a better price. This segment of operators is the majority and represents almost eighty percent of daily trading.
The spot market thus often becomes very volatile, squeezed between these two trading components. To circumvent this risk, traders avoid buying oil at current prices, but otherwise trade what we know as “futures” – ie at a predefined price and a certain date. This "modus operandi" allows you to protect yourself at least from financial risks and excessive market volatility for this raw material.
In reality, five factors influence the price of crude oil:
La current question;
THEcurrent offer;
La Future question;
THEfuture offer;
Il Market sentiment.
The price of WTI oil has been traveling between 52 and 54 dollars a barrel since the beginning of the year, while the graph below shows the dynamics of prices in 2016 of Brent.
The quotation reached its maximum value in the last session of the year at $56.82 and a minimum point on January 20th at $27,88. The average annual price in 2016 was $45,13. The market is operating in a situation of supply overcapacity of about 1,5 million barrels per day, compared to demand.
The excess overproduction was partly responsible for the significant drop in the price from $112 in June 2014 to $27 last January.
Since early 2008, US oil production has practically doubled thanks to the use of the new fracking extraction technique which becomes profitable above $50.
Over the same period, OPEC refused to cut production, which would have encouraged price stabilization or at least prevented a steep decline, in an attempt to push prices so low that US production was no longer profitable.
All of this changed significantly in November 2016 when OPEC decided to cut production among its members by 1,2 million b/d, which non-OPEC countries also followed with a cut of 600.000 b/d. . This decision caused crude oil to rise above fifty dollars, consolidating the upward trend in prices since last February.
OPEC has also recently declared that it will adopt new cuts again this year, between June and August, a decision which should in theory support the upward trend in prices.
The question
Oil demand is generally governed by economic performance, population change and the size of fields, or new geological discoveries.
In fourth quarter of the 2016, global demand was measured at 97 million barrels per day, of which 56,5% was consumed by the United States, the top five European economies, China, India, Russia, Brazil and Japan. These eleven countries contribute to 70% of the creation of world GDP.
The demand for energy is directly proportional to the economic trend, while the oil demand is more elastic as it is linked to specific factors of the individual countries, such as the different sources of alternative energy.
During 2016, the demand for oil grew by 1,41%, a result to which India and China mainly contributed, by virtue of the increase in their respective populations.
The trend of shifting consumption from Europe to Asia will also be confirmed in the current year, also in the wake of the alternative energy policies developed in the Old Continent.
The main shock to the demand side is the level of US production which could affect global demand.
Between 2008 and 2016, the United States more than doubled its crude production, from five million barrels per day to 12,40, while domestic demand stabilized at around 19,5 million barrels per day.
The difference of 7,1 million barrels is equal to 7,4% of global global production.
Half of the stars and stripes production comes from expensive "fracking" drilling which requires a price of over 60 dollars a barrel to be profitable. More recently, thanks to the introduction of new technologies, the break-even price has dropped to $40 in some cases.
Donald Trump he promised to ease restrictions on the new extractive system with the aim of making the US energy sector completely independent. If Trump succeeds in his intention, the world market would consequently drop by seven percent but certainly not since 2017.
DEAL
The supply of crude oil is regulated by two large groups of producers: the OPEC cartel, the best known and most important, and that of the countries which do not adhere to it.
In recent years, squabbles within OPEC have not allowed for any deals to cut production. Saudi Arabia has tried, on the contrary, to lower prices to bring the stars and stripes production to its knees but it seems that the project has only minimally been realized, turning into a boomerang for Ryad which has to face an unexpected economic crisis internal.
In addition to Saudi Arabia, the other major cartel members are Iraq and Iran. In all, OPEC generates 36% of global production.
Among the main buyers are the USA and China, which must compensate for the difference between demand and domestic production.
Among the non-aligned countries, the most important is certainly Russia which records the second largest production in the world (11,08 million barrels in 2016) and the fourth position for the size of reserves.
In reality, there are more than a few doubts that the November agreement will not be fully respected, as many countries have their finances in trouble and are forced to produce at full capacity, taking advantage of any rise in prices.
COMMENT
The November resolution is expected to persist until July 2017; it can then be renewed for another six months, modified or definitively cancelled.
In the event of full compliance with the agreement, world production should result in a deficit of about 0,38 million barrels per day with respect to demand and consequently push crude oil prices above $57 dollars a barrel. There is always the risk of an extraordinary event which could negatively influence the current price level.
One of these events could also be the application of a "hard Brexit" which could lead to a demand shock or the implementation of some of Trump's electoral policies or other crisis hotspots in some emerging country, all shocks which could to varying degrees , rekindle supply and depress demand by penalizing quotations again.
