Global oil market has been jittery the last few weeks in anticipation of two major events: the presidential elections in Venezuela and the withdrawal of USA from the Joint Comprehensive Plan of Action (JCPOA) also known as the Iran Nuclear Agreement. Both are behind us now, and one might need to wait a little longer to see the full impact of the re-election of President Maduro in Venezuela, and the renegotiation of the nuclear deal on crude oil market. Venezuela's oil production has shrunk nearly 40 percent in the past five years due to corruption, a debt crisis, and underinvestment. Will the elections, a contested one, change anything? Would the US threat to re-impose sanctions against Iran disrupt the shaky balance in the oil market? The expectations are not rosy, according to The Economist Intelligence Unit's Nicholas Fitzroy. Even if oil export from Iran goes down by 200,000 barrels a day, and the flow of oil from Venezuela remains steady after the drop last year, the price of crude can be expected to stabilise in the USD 70 per barrel (70/bbl) mark which may be the new normal. However, if crude exports from Iran and Venezuela are curtailed further, we could see an average of 75/bbl by the end of the 2018.
Crude oil is currently on a hot streak since last fall. As of May 16, the price of crude oil has increased by 18 percent this year, and is already causing price at the retail level to go up in almost all importing countries. During the second half of 2017, crude oil price jumped by 50 percent. If you plot a line chart of crude price of time, one cannot miss the dramatic rise since early-2016 when price of crude dipped to below USD 30/bbl. Currently, it is trending at USD 78/bbl which is giving finance ministries across the globe another trade related issue to worry about. Is this jump just a temporary phenomenon, or can we foresee another “oil shock” similar to the one seen in 2014? What does this mean for big oil-producing countries like Russia, Nigeria, and Venezuela which witnessed a meltdown after oil price tumbled down? And, what can developing oil-importing countries like Bangladesh, India, and Cambodia expect in the coming years?
Let me reassure my readers that the observed fluctuation in crude oil price is purely a matter of supply and demand, with supply taking a major role in this instance. The recent sustained upward trend in crude oil prices have been driven by three forces: falling global oil inventories, heightened market perceptions of geopolitical risks, and strong global economic growth. From 2014 to 2017, supply was more than demand leading to a surplus or glut. All indicators now show the oil glut is gone.
Turning to demand, agencies which track market demand including the Paris-based International Energy Agency (IEA) and the US government's Energy Information Administration (EIA) raised their forecast for world oil demand for 2018 to almost 100 million bpd and expect this growth to continue in 2019. This is in contrast to the demand level of 97.8 million bpd in 2017. The projected demand is strengthened by the GDP growth expected for the next two years notwithstanding the uncertainties around trade wars and various volatile market forces including interest, foreign exchange, and inflation rates.
EIA estimates GDP growth for 2018 will be at its highest rate since 2012, and has the potential to increase oil consumption beyond forecasted levels, which could put upward pressure on crude oil prices. If the USA re-imposes oil sanctions against Iran and the election victory for President Maduro in Venezuela results in further disruptions in its oil sector, global oil balances will be further thrown out of kilter. “The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises and fill the gap,” the IEA said.
For oil-importing countries such as Bangladesh, higher oil prices are a mixed bag. Bangladesh benefits from higher price of crude oil since remittances from Bangladeshi working in oil-producing countries increase. Remittances in Bangladesh increased to USD 1.3 bn in March from USD 1149.08 bn in February of 2018. The February level was a 22 percent year-year monthly growth. The average annual remittances track the oil price cycle. Remittances in Bangladesh averaged USD 1.189 bn from 2012 until 2018, reaching an all-time high of USD 1.49 bn in July of 2014 during the boom in oil prices, and fell to a record low of USD 856.87 mn in September of 2017.
Analysts had previously blamed a drop in global oil price, which severely hit the oil-rich countries in the Middle East, the largest destination of Bangladeshi workers, for the fall in remittance in the recent past. Sixty percent of remittance received by Bangladesh comes from the Middle East and “remittance from the Middle-East countries dropped due to the drop in oil price and changes to the policies regarding foreign workers in these countries,” according to the Finance Minister, Muhith.
However, according to a Bangladeshi news agency, “A central bank official, requesting anonymity, said the increase in the value of and demand for US dollar against Bangladesh taka due to the pressure of import was another reason behind the rise in remittance.”
A potential source of headache for Bangladesh is the possibility of renewed pressure for oil price subsidies should the retail price inch upward. As a report by PRI warned only last year, “without a change in the domestic pricing policy stance, subsidies will re-emerge if international oil prices go up.” BPC is reported to have proposed a price hike of Tk 11 for Kerosene, Tk 7 for Diesel and Tk 13 for furnace oil.
Rising oil prices may lead to inflationary pressures. Triggered by a spurt in GDP growth, increasing demand and higher prices for other globally traded commodities, could push inflation higher, too. Fortunately, global inflation is in check for now, and is expected to remain within the 2 percent target zone set by US and EU central bankers.
What can we expect in the future? There might some price volatility in the short run owing to heightened uncertainty. IEA announced on May 16 that “Commercial oil stocks in industrialised economies have fallen to their lowest level in three years.” The production levels in Russia, Venezuela and Iran remain a major black swan and any major disruption might put a tighter squeeze on the market, and crude price may temporarily go above the base level in short bursts. However, there also has been a demand pushback. IEA cut its forecast for global demand growth to 1.4 million bpd for 2018, from a previous estimate of 1.5 million bpd. Looking into the long run, EIA's energy outlook forecasts that global supply of crude oil, other liquid hydrocarbons, and biofuels is expected to be adequate to meet the world's demand for liquid fuels through 2050.
Dr Abdullah Shibli is an economist, and Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA. His new book Economic Crosscurrents will be published later this year.