From the attack on the Saudi Aramco oil field to the ambushes on Iranian tankers, the conflict between Saudi Arabia, Iran and Yemen is becoming more intense by the day. With the inclusion of Turkey into the messy situation by entering Syria to battle Kurdish forces, conflicts in Syria and Iraq have taken a turn for the worse again. Reflecting on these developments, the geopolitical environment of the Middle East as the traditional oil production region is facing some drastic changes. Continued conflicts in the Middle East have caused huge fluctuations within international crude oil prices and has also hastened the reshaping of the global crude market. These all points to a new arrangement in the market that was in a large part led by the OPEC in the past.
With the increase of oil production within the U.S. and the rise of oil consumption in China, the supply and demand needs are experiencing fundamental changes in the past decade. China has become the largest importer of crude oil and natural gas, and its dependence on external energy has been exponentially growing. In 2018, China’s import volumes for crude oil reached 8.4 million barrels per day, succeeding in the U.S. as the world’s largest importing country of crude oil for the first time. Its natural gas imports were 125.4 billion cubic meters, surpassing Japan to become the world’s largest natural gas importer. Presently, China’s dependence on foreign crude has already risen to 70.9%, with natural gas dependence at 45.3%. It is estimated that China’s reliance on foreign oil and gas imports will continue to increase in the future.
On the contrary, the United States has not only achieved “energy independence” within 10 years but also becomes one of the largest energy exporters in the world. In the past decade, the exploration of shale fracking and the lift on the ban on the development of oil resources in the United States have caused its oil production to increase by more than twofold. The U.S. has now become the largest producer of crude oil, with its current oil production at record highs. Data from the United States Energy Information Association (EIA) shows that by August 15, American oil production volumes maintained at 12.3 million barrels per day. Along with the construction of new oil pipelines, the production capacity of U.S. crude oil will also be increased. Citigroup predicted that the U.S. oil export capacity will be increased to 6 million barrels per day if not higher. Day by day, the U.S. is becoming a supply source for the international oil market. The U.S.’ decrease in net imports for crude oil has already become obvious. U.S. net imports are currently at a 4.2 million barrel volume per day, a very obvious drop from its 6.1 million barrel per day volume at the same time last year. From the current sources of the U.S.’s oil imports, its largest importer is Canada with 3.31 million barrels per day, followed by Saudi Arabia with 470,000 barrels per day, a decrease of 53% from the same period last year. Looking at the bigger picture, the United States is importing more from its neighbor Canada and countries within the region and less from the Middle East. In fact, it seems that the United States will further decrease its oil imports from the Middle East.
Changes in the energy landscape have also allowed the United States to withdraw itself from the Middle East. This can be seen from the repeated emphasis of President Donald Trump in withdrawing American troops from Syria and Iraq. Along these lines, the U.S. sanctions against Iran and Syria will further aggravate turmoil within this region. It can be said that in the short term, oil production in Saudi Arabia, Iran, Iraq and Syria, among other countries, will come to face great uncertainty. The oil market of the Middle East will constantly be interrupted by these so-called “black swans”, causing great fluctuations in crude oil prices. In the international oil market, OPEC is continuing to cut supply. Conflicts in oil-producing areas are continuing to rise. On the other, factors like the rise in U.S. oil production, increasing global demand and a strong U.S. dollar have all affected oil prices. Despite this, the main factors that affect oil prices to an extent now or in the future are still the fundamentals of economics. The slowdown of the global economy, as well as tensions in trade, will cause demands in the global oil market to weaken, pushing capital markets to develop an overall sentiment of risk-aversion, leading capital to take flight from the commodity markets. ANBOUND researchers feel that the influence of these fundamental economic factors far outweighs the impact brought about by the geopolitical conflicts. However, these conflicts or so-called “Black Swans” can be expected to continue causing fluctuations to the price of oil in the short term. The global energy market can also be expected to maintain a generally downward trend in the future.
Should the chaotic situation persist in the Middle East, and if American crude oil production continues to increase, not forgetting long-time oil exporter Russia, OPEC will see its influence diminishing by the day. According to Bank of America Merrill Lynch Global Head of Commodities Francisco Blanch, OPEC’s market share has fallen 1% each year for the past seven years. When the U.S. increases its supply contribution to the global crude oil market, the effectiveness of OPEC’s measures to maintain higher oil prices by cutting supply will definitely be challenged. In the future, the global oil supply market will be dominated by the U.S., Russia and Saudi Arabia. It is also worth noting that as China increases its importance as a “power buyer”, it can encourage the competition between different oil-producing nations and seek for better prices, maximizing its own interests in this buyer-seller relationship. The future global crude oil market will rewrite the current layout of original oil-producing nations and countries that purchases oil, forming a new “3+1” pattern.
Geopolitical conflicts in the Middle East will also affect OPEC’s current power to set prices, causing the competition to control the financial aspect of energy to increase in intensity. The U.S. will rely on its global prowess in oil and gas, hoping to dominate the global market of oil and gas trade as well as price-setting mechanisms. With this, it will be looking to complete its “natural gas dollar” and “petrodollar” to form “natural gas-petrodollar”, further strengthening its dominance in global finance. However, other nations and regions are not willing to accept this USD dominated direction. At the same time, the EU, Russia and China among other countries are trying to promote the “de-dollarization”, trying instead to find their own right to speak at the table of energy finance. For example, since the initial offering of crude oil futures in Shanghai, RMB 24.16 trillion was traded in 2018. Chinese crude oil futures have taken the lead in becoming the crude oil futures with the highest trading volumes in Asia, only third in the world behind WTI and Brent crude futures. With more oil and gas currency settlement options in the future such as the “Petro Euro”, “Petro Ruble” and the “Oil and Gas Yuan”, it is expected that the battle between major powers to take reign of global energy finance will only intensify by the day.
Final analysis conclusion
The constant appearance of “black swans” in the Middle Eastern region will further increase changes in the global oil market. It will cause crude oil prices to increase, as well as bring about a series of changes to the balance in supply and demand levels of oil as well as energy finance, leading competition to be more and more intense.
