Wednesday, March 16, 2016

The mystery of oil prices

The mystery of oil prices

Overproduction of OPEC countries and lower demand from China have pushed down the costs of 'black gold'. But in recent weeks they rise again because of financial speculation on futures contracts. From June 2014 to February this year, that is, in the last 20 months, prices of crude oil decreased by 75%, from 108 dollars to 26 dollars a barrel. The reasons invoked for this phenomenon has occurred is that, on the one hand, there is currently an overproduction of oil that leads to market saturation; and on the other, that due to slowing economic growth in China, there is a decrease in demand.

In other words, in accordance with those put forth criteria, what comes to explain, in recent times, the brutal collapse in the prices of oil is the classic concept of the relationship between supply and demand which governs the behavior of markets an economy with free competition. In part, it is. Overproduction has meant that member countries of OPEC have about 32 million barrels placed on the market, and that after the lifting of sanctions, Iran has increased its production to three million daily barrels and Iraq provided, in addition of 4.3 million barrels each day.

In the United States, as a result of the so - called revolution of shale gas or shale gas, it has grown from 4.6 million barrels per day in 2005 to 9,600,000 today. Moreover, in these moments, America has 508 million barrels of oil in storage, which represents its greater supply capacity in the last 80 years. On the demand side, it is unquestionable that China passing a growth rate of 12% of GDP to 6.5%, and the change from one model to another internal export development, capacity demand for oil has diminished.

But if the fundamentals of the economy, that is, supply and demand are the determining causes of the drastic fall in oil prices, why the face of oversupply or declining demand producing countries oil have not taken measures to reduce production? What holds is that Saudi Arabia, in order to protect their market shares, preferred to maintain their current production levels. With that, it pushes downward oil prices and competition out of the new US shale gas producers. Although this policy because Saudi Arabia has seen undermining their income, have decreased their reserves, has increased its deficit and its debt has risen, the fact remains that has also caused the bankruptcy of many new US oil companies.

The bankruptcy of these US companies has raised serious concerns in the financial sector. Banks have been exposed to the risk of not being able to charge loans at the time when oil prices were above $ 100 a barrel.

In addition, for purposes of correlation, the collapse of oil prices has had an impact on stock markets, which have seen decrease the value of corporate shares in the markets of Shanghai, New York, London, Hong Kong and Frankfurt. But if that is the situation of new producers, the financial sector and stock markets, why the US government has not intervened in his favor, pressuring Saudi Arabia and other OPEC members to reduce production and, consequently, to raise prices?

Perhaps because, so far, the US priority has been another. It was, rather, geopolitical oriented, by way of declining oil prices, to cause the weakening of the Putin government in Russia after the crisis in Ukraine, as currently happens; to force Iran to negotiate its nuclear program, as indeed it was achieved; and wear down the government of President Nicolas Maduro, in Venezuela, as is happening.

The price changes are not due only to the laws of supply and demand
It is also likely that other variables have been taken into consideration for not taking measures favorable to increased oil prices. For example, you may face the weak growth of the global economy, arising from the financial crisis unleashed in late 2007, it has seen a drop in oil prices could be a stimulus for recovery. Anyway, the truth is that against the bleak picture that has created the drop in oil prices, countries such as Nigeria and Venezuela have pushed both Saudi Arabia and OPEC to lower production and encourage an increase in prices crude.

But as has been reached it is to freeze production. Thus, the market factors that have determined the collapse of oil prices, supply and demand remain unchanged, so that there would be no reason for a rise in prices.

However, after falling in February, its lowest level since 2003, during the last two weeks the price of oil has risen by 32%, to reach quoted above $ 34 a barrel. The only thing that could really explain this new situation is the strengthening of the US dollar and the involvement of hedge funds ( hedge funds ), investment banks and insurance companies in buying futures contracts for oil, through financial speculation. That's what happened in 2008 when oil prices rose from $ 147 a barrel in June of that year to only $ 30 six months later, there were no change in market mechanisms.

Now we know that price fluctuations do not correspond exclusively to the laws of supply and demand. Also other factors, such as the new form of financial speculation on futures contracts. Therein lies the mystery about oil prices.