Three factors that could impact oil prices
The Indian Express, July 30, 2019
Udit Misra
Udit Misra
The trend of crude oil prices mirrors the slightest of changes in geopolitics, apart from the steady course of economic news. In the simplest terms, crude oil prices will move up when something causes the demand to rise or the supply to fall.
In the past six months, crude oil prices have steadily risen from the lows of December 2018 — from $50.1 per barrel on December 28 to $74.7 a barrel on May 16 — primarily because of oil production cuts by the Organization of Petroleum Exporting Countries (OPEC), a group of 14 including Saudi Arabia, Venezuela and the United Arab Emirates. It controls roughly 40% of the world’s overall oil supply and its exports account for 60% of all petroleum traded globally — as such, its decisions to cut or expand production have a huge impact on global oil prices.
However, since mid-May, and especially over the past few weeks, oil prices have seen renewed fluctuations (see chart below). The fluctuations reflect the ups and downs in the factors determining crude oil prices. Here are three key factors likely to affect the movement of crude oil prices.
The new Iran Deal
In Vienna on Sunday, officials from Britain, France, Russia, Germany and China met their Iranian counterparts in an emergency meeting hoping to defuse rising geopolitical tensions in West Asia and to salvage the so-called Joint Comprehensive Plan of Action (JCPOA). The JCPOA is better known as the Iran nuclear deal and the US unilaterally pulled out of it in 2018. Since then tensions have escalated between the US and Iran, even as the other countries involved have been trying to avoid the deal from becoming defunct. Over the past few weeks: the US has threatened to launch airstrikes after Iran shot down US drones; the International Atomic Energy Agency has alerted that Iran has breached its side of the bargain by stockpiling more low-enriched uranium (which is used to make nuclear bombs) than it was allowed to in the nuclear deal; and Iran and the United Kingdom have impounded each other’s oil tankers.
After the first meeting in Vienna, Iran’s Deputy Foreign Minister Abbas Araghchi said: “The atmosphere was constructive. Discussions were good. I cannot say that we resolved everything, I can say there are lots of commitments”. This signalled that supply disruptions may not happen and, as a result, oil prices cooled off.
US-China talks
The second big factor is the trade impasse between the US and China. Talks between the two biggest economies restarted in Shanghai Monday. The key worry is that if the tussle carries on between the two economies, it will further slow down global growth (and hence oil demand). The initial response from the talks is pessimistic and as such, here, too, the result has been that oil prices came down a bit, but only after they had first gone up in hope.
Federal Reserve rate cut
The third big factor is the decision of the US Federal Reserve later in the week. The Fed, as it is often called, is widely expected to cut interest rates for the first time since the 2008 financial crisis. The link between a cut in interest rates and oil prices is not clear. However, if the rate cut leads to higher demand, chances are oil prices will move up.
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