Crude Oil 2019

Crude Oil 2019

Crude oil prices in 2019 have shown an unpredictable curve. 2019 has been a challenging year for the energy oil markets as the growth in oil demand reduces. The average price for crude oil from January 2019 is likely to average at $60 per barrel according to the U.S. Energy Information Administration’s energy outlook. The prices spiked during the spring season as oil dealers looked forward to the high demand during summer. After the high peak in summer, the prices went down for the winter. The unexpected swings in factors that affect oil demand and supply have made the prices volatile for example in 2014 June; the prices averaged at $100.26 per barrel, one year later, that is June 2015, the prices dropped to $60. 2016 January had the lowest rate of 26.55 dollars. Today, the costs keep on fluctuating due to the continually changing markets. Last year September, the prices averaged at $81.20 per barrel.  The traders remained optimistic for the 2019 low shortages due to the Venezuela outages and the U.S. consents against Iran. This year the prices have ranged between $45 and $66.30, forming an average of $60. The Organization of Petroleum Exporting Countries (OPEC) has aimed to lower the outlook numbers for oil demand growth to approximately 104.8 million barrels each day come 2024. According to the forecast, the crude oil production for OPEC is expected to decline in the next five years to 32.8 million b/d by 2024 from the 2019 supply that is 35 million b/d. The fluctuating changes in demand and supply are the leading cause of the price fractions in the OPEC regions.

The demand and supply model states that the price of any good can only level if the amount demanded is equal to the supply. At this point, the goods are at the equilibrium level, and the markets become stable. It is, therefore, easy to predict the next outcome in the market.  If the supply decreases or increases without any change in demand, then this corresponds to an increased or reduced equilibrium in price and quantity. On the other side, if demand rises or reduces without a change in supply, then this corresponds to an elevated or reduced equilibrium in price and quantity of the item. When high the price goes high, the demand reduced, and vice versa.  Below is a standard demand-supply curve for any market commodity.  S represents the production or supply, D is the demand, and P is the price. The price P is determined by the balance between supply S and the demand D. a positive shift in demand (that is from D1 to D2) leads to an increase in price P and quantity sold Q.

The same case happens to oil demand. Crude oil demand in OECD countries is increasing adversely, and this constitutes 66% of the total demand across the world. From 1980 t0 2008, the demand increase by 40%, which was 60 million b/d to 85 million b/d.  Given that oil has few direct substitutes, then the demand is relatively inelastic with respect to price and income in advanced OECD countries. In developing countries like India and China; however, the income elasticity of demand (YED) is likely to be high based on the estimation that YED is almost equal to one. There are ten major oil consumers compared to the twenty oil producers across the world. According to this data, the supply is higher than the demand, and therefore this explains the low price of crude oil products. However, the elasticity of the supply/demand curve can also be affected by other conditions such as the market structure for crude oil, and price-fixing and cartel activities.  The supply of crude oil in OPEC countries has been decreasing gradually to cover for the low demand in oil-consuming countries.  OPEC made a deal with other non-OPEC countries together with Russia to restrain oil production so as to support the crude oil market. The dramatic fall in crude oil prices from mid-2014 to 2016 resulted from the increasing supply and gratifying demand, and to prevent the same situation from reoccurring, the OPEC deal aims at reducing the supply in order to raise the demand curve.

According to the current crude oil market structure, the OPEC expects the oil demand to continue rising at a relatively fair rate over the next five years. However, this incremental growth is expected to come from developing countries like China and India. India already showed a raping increase in oil demand from the records of the last two decades. However, despite the effort to control the oil supply, more counties have discovered new oil fields. Iran discovered a new oil production site in the southern part of the country, and according to President Hassan, it is likely to reinforce the proven reserves by a third as it finds its market abroad. This means that the oil prices are expected to go down again in the next year since the supply will still be high as compared to demand.

The demand/supply elasticity has been affected by price-fixing activities such as conflicts among OPEC and non-OPEC countries, leadership decisions, Vienna groups, the influence of international cartels, lapsed members, and observers. The top oil-producing nations have shown an increase in production over the last decade and thus exceeding the production ceiling. As a result, China experienced slow economic growth. To ensure each country benefited substantially from the oil supply OPEC derives a strategy to fix the oil supply by controlling the level of production in its region. However, some countries have opted to withdraw from the deal like Ecuador, which departed from OPEC out of the poor state of the country’s economy. Other countries that lapsed from the deal include Qatar and Indonesia. The withdrawal of these countries has made it difficult for OPEC to control the overproduction of crude oil. These countries are likely to take advantage of the low OPEC supply to dominate the crude oil market. The OPEC members have severally exhibited perceptible anti-competitive lobby behavior by making agreements concerning oil production and fixing price levels. OPEC has been described as a cartel group that works on cooperation to reduce the market competition. According to the state of crude oil demand, the demand rises during summer due to the high rate of fuel usage. At this time, the supply should be moderate to ensure high fuel costs. During winter, crude oil consumption is low, and therefore should the supply be low.

However, despite the price control measures, the prices may fail to be affected due to a number of reasons. First is the existing stock at old prices in the market. Much ever, the cost of crude oil represents around 20% of the price of the by-products.  The retail market has become highly competitive in many countries. The non-OPEC countries still insist on selling their crude oil at a subsidized price to win the market competition. As a result, the effort to control the market price of crude oil has not reached its target.