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Oil prices remain low despite ongoing conflicts

Rashid Husain SyedWhy do oil prices continue to be depressed? Despite two ongoing wars, one in the oil-rich Middle East and the other between Ukraine and the energy giant Russia, oil prices have largely remained unaffected.

Last Friday, as the week approached its end, oil prices settled more than two percent lower, with Brent crude futures down $1.92 or 2.3 percent to $84.89 a barrel. West Texas Intermediate crude futures also fell $1.95, or 2.4 percent to $80.51 a barrel. On a weekly basis, both benchmarks settled more than six percent lower.

Two reasons are being given for this softening of the oil markets despite the ongoing wars.

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Prince Abdulaziz bin Salman bin Abdulaziz al-Saud
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The first is that the war in the Middle East has not spilled over, yet, to other parts of the region. While neither Gaza nor Israel are significant producers of crude oil, in the oil-producing Middle East, including Saudi Arabia, hardly 900 km from Gaza, life remains as usual. And despite some lip service, Iran has also shown little enthusiasm for entering the battle arena in any real sense.

And that despite all the Western sanctions, Russia continues to export oil. There has not been much impact on exports from Russia.

Thus, there is little ‘war’ premium. There was a knee-jerk reaction in the immediate aftermath of the Hamas attack on Israel on October 7. But even then, the price spike was not too significant, and that, too, was brief.

Oil markets continue to be ruled by the geopolitics of oil and the budgetary requirements of major oil producers, specifically Russia and Saudi Arabia. So, despite the ongoing ‘war’, oil markets soon resumed their downward journey.

And while the supply side of the equation has not been impacted in any real sense by the ongoing ‘war’, dark clouds are beginning to dominate the crude demand horizon. This is holding the markets tight from any real, upward momentum.

To a certain extent, China, along with Brazil and some Asian economies, has been the real growth engine of the world for years. That engine is stuttering. A private survey on Friday showed that while China’s services activity expanded at a slightly faster pace in October, sales grew at the softest rate in 10 months and employment stagnated as business confidence waned.

The Chinese National Bureau of Statistics reported last week that China’s manufacturing activity contracted in October. The official purchasing managers’ index (PMI) fell to 49.5 in October from 50.2, dipping back below the 50-point level, demarcating contraction from expansion.

Taking the cue of a slipping demand, American drillers are also throttling back. They seem wary about slipping prices. According to oilfield service firm Baker Hughes, drillers dropped eight rigs in the past week, leaving 496 active rigs across the U.S. oil patch. That is starkly down from 627 at the end of November last year.

When seen from the perspective that this followed the additional, voluntary output cut from the OPEC majors – Saudi Arabia and Russia – these are warning signs for the global crude demand scenario. The uncertainty factor has entered the equation.

The World Bank is of the view that if the Israel-Hamas conflict doesn’t widen, then as per its “small disruption” scenario, the effects of the ongoing ‘war’ should be limited – and oil prices are expected to decline in 2024 to an average of $81 a barrel.

Richard Bronze, co-founder and head of geopolitics at consultancy Energy Aspects, told CNN earlier last week that the biggest reason for the decline in oil prices was the concern in the “market about the health of the global economy and the implications for oil demand.” There are indications that oil demand is softening globally, particularly in Europe, he added.

Concerns about global economic growth were also underscored last Monday when Germany – Europe’s biggest economy – reported that its gross domestic product shrank in the third quarter as consumers reined in spending.

Pressure on oil consumption is also growing because of the global push to imminent switch to alternatives. With nearly 10 times as many electric cars on roads than today, by 2030 80 percent of new power is projected to be derived from renewables and electric heating, outselling gas boilers, the International Energy Agency (IES) stressed in its just unveiled World Energy Outlook 2023: “the energy world will look different by 2030, even under today’s policy settings.” The IEA also claims that crude oil, natural gas, and coal will peak before 2030.

“The transition to clean energy is happening worldwide and it’s unstoppable. It’s not a question of ‘if’, it’s just a matter of ‘how soon’ – and the sooner the better for all of us,” said Fatih Birol, IEA executive director, in a statement.

Oil producers, however, do not seem to agree with this projection. They still feel fossil fuel will be in greater demand beyond 2030, and that the IEA projections are more ‘political’ than realistic in nature.

And according to OPEC the latest rash of high-scale oil and gas mergers and acquisitions indicates that fossil fuels are here to stay. “Exxon, Chevron didn’t buy because they want to have stranded assets,” Saudi oil minister Prince Abdulaziz said at Riyadh’s FII annual investment conference a couple of weeks ago. He was referring to Exxon’s announcement of its $60 billion acquisition of Pioneer Natural Resources and Chevron’s $53 billion acquisition of Hess.

Prince Abdulaziz said the same of his own motivations for investing in increasing Saudi Arabia’s oil output capacity to 13 million barrels per day. “We are investing not to create a stranded asset,” he said. He added that Saudi Arabia wouldn’t be investing in increasing oil production capacity if there wasn’t demand for that increased production.

Yet, there is another very important angle to this ongoing debate. The rush in Saudi Arabia, the OPEC kingpin, to diversify away from oil revenues and lessen reliance on petrodollars, as envisaged in its Vision 2030, raises serious questions. Despite some bold posturing, Riyadh may not be strongly confident of a positive energy outlook in 2030 and beyond. Hence its rush to diversify.

The apparent lack of demand has played a significant role in keeping the crude oil markets tamed, despite two hostilities engulfing the world today.

The global energy equation has changed, and the IEA has a point.

Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.


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