Iraq Pumps More Oil – What Does This Mean for Global Markets
Oil prices continue to drop as OPEC countries expand their production, oversupplying the markets and attempting to undercut the profitability of US shale oil fields. Recently, a shock announcement was made by the Iraqi Oil Minister Adel Abdul Mahdi stating that the country would expand production to a record level of 4 million barrels per day. This decision, along with that of Saudi Arabia and the United Arab Emirates to continue production at current levels caused a sharp decline in the price of Brent crude oil. The global oversupply looks set to continue throughout 2015 as demand simply cannot keep up with oil-rich countries trying to maintain their market share. The problem has been hampered by fears of deflation across the eurozone and Japan, and a Russian economy that is currently experiencing a negative growth rate with massive devaluation of the ruble and unprecedented capital flight.
Surging Levels of Global Oil Production
OPEC countries and the US increased their production capacity in 2014 despite plummeting oil prices and weak demand. It was reported that US oil production had increased to its fastest rate in over 30 years; while Iraq’s productive output hit a 35-year high. The IEA (International Energy Agency) anticipates that Iraqi oil production will increase further in the coming months. As it stands, Iraq’s crude oil exports will be increased to 3.3 million barrels per day in 2015, up 306,000 barrels per day from the figures reported in December 2014. Saudi Arabian oil shipments increased to 7.3 million barrels per day, up 400,000 barrels per day from October 2014.
Indeed, commodities analysts around the world are of the opinion that an oil price above $50 is unlikely for any sustained period of time. The new support level is between $40 and $45 per barrel for both Brent crude oil and WTI crude oil. OPEC currently supplies around 40% of global oil, and its joint target volume of 30 million barrels per day was reaffirmed at a key meeting held on the 27th November 2014. Oil futures for March delivery have declined to $49.05 per barrel on the Ice Futures Europe Exchange (down $1.12). Likewise, WTI crude oil for February delivery was last recorded at $47.62 per barrel (down $1.07).
Problems with the Shanghai Composite Index
Oil’s woes are being compounded by problems in the Chinese stock markets. The Chinese government is attempting to tighten the screws on margin trading, which has grown significantly in recent months. As a result of Chinese government intervention, the Chinese stock market recently endured its biggest pullback since 2008. The Shanghai Stock Market dropped 7.7 percentage points on January 19, 2015.
This marks the biggest single day decline since June 2008 with many major banks’ shares slumping 10% – the maximum permissible amount in a single day’s trading. Regulators in China are seeking to curb margin trading activity whereby investors lend money from stockbrokers to buy shares using leverage. As a result, the CSRC (China Securities Regulatory Commission) moved swiftly to ban 3 major brokers including Guotai Junan Securities, Citic Securities and Haitong Securities from opening additional training accounts for a period of 3 months. These moves sent shockwaves through the global markets, causing the price of oil to move lower.
US Oil Producers Suffering From Cheap Oil Prices
The number of US drilling rigs in operation as of January 16, 2015 is 1,366, a decline of 209 since December 5, 2014. The number of drilling rigs reported as idle has increased as the oil price continues to drop. It is widely assumed that OPEC countries are seeking to bully the US out of the international oil markets by causing prices to drop so low that it becomes unprofitable for the US rigs to maintain operations. However, US oil output increased to 9.19 million barrels per day as of January 9th, 2015, which is also the fastest growth rate since 1983. Stability in international markets will be tested in the upcoming days when the European Central Bank holds its policy conference vis-a-vis quantitative easing on January 22. Further pressures are expected when the Greeks go to the polls to elect a new prime minister on January 25. The anti-austerity party in Greece – Syriza – is seeking to break the shackles of restrictive EU repayments and policies, and expand government spending to spur economic growth. Germany does not foresee a problem if Greece decides to abscond from the currency union, but the euro will certainly experience tremendous turbulence if this happens. This will likely add further downward pressure to the oil price which could ignite a deflationary spiral across multiple sectors.
Author’s Bio: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise for the globally renowned spread betting and CFD trading company – Intertrader.