What caused the slump in oil prices?

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Europe

Editor's note: Ramil Azizov is an expert and consultant on the oil economy and trade. The article reflects the author's opinion, and not necessarily the views of CGTN.

There has recently been a sharp decline in oil prices around the world. The Brent crude has again reached around 60 U.S. dollars while "light" declined to about 51 U.S. dollars per barrel.

A major reason for the sharp decline is the U.S. policy towards Iran. U.S. President Donald Trump abandoned the nuclear deal signed with Iran and imposed a new set of sanctions on the country.

It was expected that the price of oil would increase due to the shortage of oil, but Trump ruined all the speculation and skillfully used it as a manipulation technique.

Iranian President Hassan Rouhani (L) attends a meeting in Tehran, Iran, November 5, 2018. /VCG Photo

Although the sanctions were imposed on November 4, they have not been as severe as Trump said. On the contrary, they have been very "soft": China, India, Turkey, S. Korea, Japan, and Italy will be allowed to import oil from Iran within six months.

As a result of Trump's policy, almost all oil producing countries began increasing their oil production, thinking that prices would rise sharply.

Russia and Saudi Arabia were the states leading these countries. But the "supply" volume in the oil market has exceeded the "demand" and the economic balance has been broken causing oil prices to fall sharply.

Another reason was the increase in oil production in the United States. Daily crude oil production in the United States last week reached 11.7 million barrels. This is a new record in U.S. oil production history.

According to the latest statistical data, this increase has made U.S. become the world's largest crude oil producer, surpassing Russia.

VCG Photo‍

Naturally, the U.S. record breaking oil production increase did not stop oil prices dropping in the market and maintained stability, and soon after, other oil prices began to decline.

The Jamal Khashoggi incident also influenced the price of oil as his murder and the subsequent cover up coincided with the period of sanctions and changes in oil prices. After confirming the fact that Khashoggi was murdered by the Saudi regime, many European states stopped their trade in various forms, including the sale of weapons to Saudis.

This led to the emergence of new speculations about oil prices. Although Trump came to the defense of Saudi Arabia's Prince Mohammed bin Salman, he did not exclude the use of sanctions against the Saudis, a move which has affected oil prices.

Recently, Russian President Putin and Crown Prince Salman had a meeting within the framework of the G20 Summit; they have reached an agreement on the decline in oil production. Thus, the price of oil has risen lately. But this agreement will not necessarily lead to a sudden rise.

In our view, it is just a step toward avoiding a sharp decline in oil prices and will instead stabilize the price of oil.

Before the OPEC meeting on December 6, Qatar, an OPEC member for 57 years, declared its withdrawal from the group.

There are many political and economic reasons for its this. The main reason is that Qatar cannot be considered the main actor in oil production and price determination in OPEC and another one is the ongoing "Gulf crisis" with Saudi and other countries.

Saad al-Kaabi, Minister of State for Energy Affairs of Qatar, speaks during a news conference in Doha, Qatar, December 3, 2018. /VCG Photo

We think that the withdrawal of Qatar will not have any significant impact on oil prices and OPEC activities. Because, Qatar is a state specializing in the production of gas, not oil.

Qatar is 11th place in OPEC for oil production and, if the country does officially leave the group, it will not stop oil production. Officials have clearly stated that in the future that they will continue to follow the OPEC principles.

It is expected that the OPEC meeting in Vienna will have a serious impact on oil prices, even if an agreement on a sharp reduction in oil production is not expected due to it being a step is against the current U.S. interests and policies.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)