A new alliance for the oil market

A new alliance for the oil market

Elisa Maria Giannetto
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Supply and demand trends for crude oil are feeling the effects of numerous economic and geopolitical variables. Now new alignments on the horizon may upend traditional paradigms in view of the possibility of reduced output

Oil seems to elude the law of market equilibrium. With such low prices, one would have expected new supply contracts and strong growth in demand, but the opposite is happening. The allure of black gold doesn’t seem to draw as it used to. According to the International Energy Agency, annual investments in oil exploration went down from $780 billion to $450 billion over the course of the last two years. This downward trend is unprecedented, and there are still no signs of recovery in 2017. "The cuts to investments in exploration," reads World Investment Energy 2016, "have already led to a severe drop in discoveries of new oil deposits, which are now at levels not seen in 60 years." The IEA has also raised the alarm on low global reserve capacity, partly due to the plight of war-torn Libya, Iraq and Nigeria.
Oil also needs to contend with the rise of fracking in the USA and the political instability and soaring budget deficits of African countries, not to mention an increasingly necessary and concerted global effort to go green. This complex situation requires different solutions from those of the past and new, surprising alliances. One such alliance was laid out by Mohammed Sanusi Barkindo, Secretary General of OPEC, who raised the possibility of an agreement not only among OPEC members but other nations as well, first and foremost Russia, in order to reduce output and thus stabilize and hopefully raise the price of crude oil a little.
In this scenario, the linchpin would be Iran, which has declared its wishes to resume exporting at pre-sanction levels, or 4.5 million barrels per day, double its current output. Then there is India, which is ready to purchase 6 million barrels of Iranian crude for its own strategic reserves and to guard against any future sharp rises in oil prices. Nevertheless, Barkindo, who recently visited Tehran, assures President Rouhani that he can count on his involvement.