Reasons for black gold price increase again

(Baonghean) - After a long period at a record low, the price of black gold has continuously reversed and increased again and is currently at its highest level in the past half year. This has caused the world to ask many questions. What is the reason for the recovery of oil prices? Is the time of cheap oil over and how long will the upward trend of oil prices last?

Supply and demand balance

Oil prices began to plummet in mid-2014 and continued to hit new lows until October 2015. Since then, predictions about oil prices this year have been debated, with some predicting that they will continue to fall, while others believe that once they have hit bottom, they may turn around and rise again.

Oil prices rose to their highest level in six months. Photo: Internet.

However, the downward trend and “new bottom” of black gold did not occur in the first months of 2016. Oil prices have gradually increased from the lowest level of 26 USD/barrel at the end of 2015, to 30 and then 40 USD/barrel. Most recently, on May 17, oil prices on major trading markets were close to the threshold of 50 USD/barrel - the highest level in the past 6 months.

So what caused oil prices to reverse and go up? For a long time, the rise and fall of oil prices depended on the difference between supply and demand. The time when oil prices hit a record low was said to be due to supply exceeding demand. The world's "oil granaries" such as Saudi Arabia, Russia, the US, and Venezuela all increased their production at that time. In particular, the development of shale oil in the US caused oil production to increase dramatically. Meanwhile, large economies such as China and Europe developed moderately, causing oil demand to decrease compared to the previous period. That was the main reason why oil prices continuously went down.

According to Goldman Sachs, the oil market has shifted from surplus to deficit sooner than expected. Photo: Reuters.

Now, as oil prices rise, the most obvious thing is that the two factors of supply and demand have begun to balance again. Oil production has begun to shrink as companies limit investment in exploiting new mines. That is the case in the US and Brazil. Last weekend, two more US energy companies filed for bankruptcy, following dozens of others before. Not to mention, the decline in production due to forest fires in Canada, the economic crisis in Venezuela and especially the unrest in Nigeria is causing oil production in May to be lower than consumption, for the first time in the past two years.

Furthermore, the biggest reason for the sharp increase in oil prices in recent sessions comes from the latest report by Goldman Sachs on the global oil market. Accordingly, the oil market has shifted from a state of surplus to a shortage of supply sooner than expected, because demand remains high while production has decreased significantly.

Goldman Sachs, a prestigious international investment fund, often makes the most pessimistic comments about oil prices. In September 2015, they shocked the world market by stating that oil prices would fall to $20/barrel before recovering. Therefore, the latest report from Goldman Sachs is like a way to "reassure" the market and investors that the balance of supply and demand in the oil market is finally coming to an end.

Is the time of cheap oil over?

But will this equilibrium last? Or in other words, is the era of cheap crude oil over? It is difficult to give an exact answer to this question because the fluctuations in oil prices have long depended on fluctuations in the world political situation. Serious political and economic crises in major economies in South America such as Brazil or Venezuela, which are also the world's leading oil suppliers, will certainly affect oil prices in the short term.

Unresolved political instability in Libya and Nigeria will also disrupt supplies from these “oil granaries.” In general, oil supplies from non-OPEC members will decline.

However, there are other factors that influence the increase in supply. Such is the case of Iran. After being “untied” from sanctions, the country’s oil industry has the opportunity to revive with a sharp increase in crude oil production. Specifically, in April, Iran’s oil export turnover increased by 700,000 barrels/day compared to the time before the sanctions, exceeding the expected level.

Tehran has recently flatly rejected the OPEC countries' proposal to "freeze" production. Iran's decision has also worried Saudi Arabia - the world's largest oil exporter, which is determined not to freeze its quota. The failure of the recent Doha (Qatar) negotiations between OPEC and non-OPEC producers shows that countries will continue to follow their own strategies, especially Saudi Arabia. In an interview with the press last month, Saudi Arabia's Deputy Crown Prince Mohammed bin Salman affirmed that the country can immediately increase production by 1 million barrels/day if necessary.

This will cause unpredictable developments for the black gold market. There have been comments that, after witnessing a short-term price increase, oil and gas exploration and exploitation activities, which have declined in recent times, may increase again, pushing the market into a state of oversupply in early 2017. However, in the short term, oil prices will not hit rock bottom as they did in the past. Investment firm Goldman Sachs predicts that oil prices will fluctuate between 40 and 45 USD/barrel until the end of this year. However, the future of oil prices will continue to be a puzzle and all predictions will only be relative.

Thanh Huyen