Sputnik: Some experts have stated that because of politics, warning signs over the current oil price are being ignored, what is your take on that?
Scott L. Montgomery: To some degree, I think this is correct. Oil prices have long been affected by geopolitical trends and events that involve major exporters and importers. This is part of what makes the oil market not only dynamic but volatile, with such volatility higher at some times than others. Right now is one of those times, and commentators should emphasize this routinely, which they don't do enough.
The global context includes increases in the demand for oil, especially in non-OECD nations, due to economic growth. Within this context, key influences include:
the war in Yemen, with Iran-backed Houthis firing missiles at the Saudi capital, Riyadh; the Saudis say they are hoping for an oil price of 80 USD. Their regional struggle with Iran for regional dominance has a good chance of adding to higher prices.
The war in Syria, where two big exporters, Russia and Iran, are allied against the US, a growing global exporter, and Saudi Arabia. Israel is a factor here, too, due to elevated tensions and recent military encounters with Iran. Aggressive statements by any of these nations can send prices up or down without warning.
Cooperation between Russia and OPEC on restricting oil production to raise prices. Any signs of further strength or cracking in this group of exporters, or of further sanctions placed on exports by members, will affect prices too.
The looming trade battle between the US and China, if it happens, would reduce global trade and therefore oil demand.
Despite the long-term upward trend in prices since June of last year, all of the above should make us expect prices to be quite volatile for the near future.
Sputnik: What consequences can these fluctuations have on the global oil market?
Scott L. Montgomery: They introduce an element of real uncertainty for everyone, [including] producers, refiners, exporting companies, and importing countries. It is difficult to make plans for future drilling, crude oil or refined product sales or purchases of the same when prices are so volatile. Such uncertainties then add to the volatility of market prices-traders tend to react more strongly to events when there is less short-term stability.
Such fluctuations will also make some companies in North America more cautious about expanding their exploration drilling and increasing production.
On the other hand, if swings in price are large enough or high volatility continues into the summer months (in the northern hemisphere), they could cause damage in growing economies and a fall in global oil demand.
Sputnik: Who benefits from these fluctuations?
Scott L. Montgomery: Overall, major exporters like Russia and Saudi Arabia tend to benefit most in a highly volatile market, as long as the price swings are not too great. This is because the ups and downs in price tend to cancel each other out when very large volumes of oil are exported. Obviously, this would change if a major downward trend occurred, like that between November 2016 and November 2017.
Sputnik: In your opinion, could this development pave way for a change in the US benchmark oil price?
Scott L. Montgomery: Yes, to some degree. But another main factor affecting WTI prices right now is the lack of enough pipelines to bring new oil to market. Though a fairly large pipeline came online last December, no other added lines are due to be complete until 2019. This will probably increase price volatility as much as geopolitical events.
Sputnik: With the escalation of the Syrian conflict, do you think more changes will occur in the oil market?
Scott L. Montgomery: As I noted above, this war has become a key factor influencing global prices, and there are a number of things that could raise prices very quickly. One I didn't mention is a missile attack on the Assad regime by the US and a significant response by Russia (against US-led forces or positions). This could elevate prices as well. The prospects for conflict between major oil suppliers are truly concentrated in Syria.
Sputnik: Saudi Arabia has suggested that it would continue to withhold its supply. What consequences can this have?
Scott L. Montgomery: Saudi Arabia can't control global prices on its own any longer. It needs Russia and some other OPEC nations to join it. If Russia, in particular, does not agree to hold back supply, then the effect of the Saudi's effort will be weak unless they withhold a large amount, e.g. 1.5 — 2.0 million bbls/day or more.
It is important to point out that Riyadh and Moscow (and the rest of OPEC) are now talking about controlling production using guide prices for up to 10 years or more. This would not mean, exactly, that Russia is part of OPEC. But it would mean that there is a new oil cartel with Russia playing a central role in it. As US exports continue to grow over time, this new cartel will be challenged to maintain effective control over the market.
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