WHY OIL PRICES REMAIN SUBDUED?
Recently, oil prices have shown some volatility due to a political dispute in Libya, which has significantly curtailed the country’s oil output.
KEY FINDINGS:
- On early Friday, Brent crude oil futures were priced slightly over $80 per barrel, marking a 5% increase from a week earlier.
- However, prices have since dipped back below this level.
- Despite ongoing geopolitical issues in the Middle East and Libya, oil prices remain relatively calm compared to recent historical averages.
FACTORS CONTRIBUTING TO SUBDUED OIL PRICES
1. Ample Global Oil Supply:
- Current Supply Dynamics: The global oil market is well-supplied. Key oil-producing countries, including Brazil, Canada, Guyana, and the United States, are ramping up production. This increase counters the production cuts imposed by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, who have reduced output by approximately five million barrels per day (bpd), or about 5% of global demand.
- Impact of Supply on Prices: The substantial oil supply available in the market helps to restrain prices. According to Jim Burkhard from S&P Global Commodity Insights, the ample supply, even with geopolitical concerns, has minimized their impact on prices.
2. Geopolitical Factors:
- Libya’s Political Crisis: Libya’s ongoing political turmoil has led to a significant reduction in oil production. The power struggle between the internationally recognized government in Tripoli and the rival administration in eastern Libya, which controls most of the oil fields, has led to the shutdown of more than 60% of the country’s oil production, amounting to approximately 750,000 bpd.
- Market Reaction: Despite these disruptions, the global oil market has only experienced a modest price increase, reflecting that the shutdown represents less than 1% of global oil supplies. Analysts expect that the political standoff will either resolve quickly or continue impacting the physical oil market, potentially driving prices higher if the disruption persists.
3. Expected Increase in Oil Production:
- OPEC’s Production Plans: In June, Saudi Arabia and its allies within OPEC agreed to gradually reintegrate up to 2.5 million bpd back into the market starting in October. The decision’s execution will be closely monitored, as it is critical for balancing global supply and demand.
- Saudi Arabia’s Concerns: Saudi Arabia faces a delicate balance. While there is pressure from member countries like the UAE, Iraq, and Kazakhstan to increase production to justify their investments, a rapid increase could potentially overwhelm the market and depress prices.
4. Slowing Demand:
- China’s Role: Global oil demand is projected to grow by about one million bpd in 2024, a significant decrease from the previous year’s growth. This slowdown is largely due to reduced consumption in China, which has historically driven a substantial portion of global oil demand increases.
- Shift to Electric Vehicles: China’s transition to electric vehicles (EVs) is expected to reduce diesel and gasoline demand in the coming years. The International Energy Agency (IEA) notes that without the rise of EVs, global oil demand would be around 800,000 bpd higher.
Note: Connect with Vajirao & Reddy Institute to keep yourself updated with latest UPSC Current Affairs in English.
Note: We upload Current Affairs Except Sunday.
