The uncertainty in demand, high production and skepticism about the willingness Exporting Countries & # 39; the organization & # 39; Petroleum production to suppress joined to lower oil prices b & # 39; drastic. This perfect storm is raising questions about the price stability on both short and long-term & # 39; time, by putting pressure even greater at many of the top non-US producers will meet in Vienna on December 3.
To better understand x & # 39; is & # 39; ahead, the market participants are well advised to pull knowledge from what economists call "theorem of raggruppa" economic model that helps explain D- price dynamics.
The last week, the oil prices decreased by & # 39; 10 percent in & # 39; volatile business that was amplified by & # 39; signs & # 39; frenali repetition by some market participants. The price for WTI fell mix & # 39; b & # 39; & # 39 in third, less than two months, to US $ 50 at the end of last week from high & # 39; US $ 76 on Oct. 3. Some analysts warn that the market can & # 39; even repeat the pattern & # 39; a few years ago, when oil prices fell & # 39; b & # 39; more than half, from close to US $ 90 in & # 39; November 2014 to just US $ 41 in & # 39; January 2016.
Three distinct factors triggered the recent price withdrawal, which occurred despite further sanctions & # 39; the United States on Iran to limit the ability of & # 39; that oil exporting country:
Further evidence of & # 39; global economy is weakening, including disappointing data from Europe and growing concerns about the economic well-being of China. Confirmation that the production of & # 39; the United States is increasing, including a doubling in shale production from 2012. Repeated calls by President Donald Trump for Saudi Arabia to avoid any actions which result in higher oil prices.
Saudi Arabia recently signaled its interest in leading a new effort to stabilize prices by reducing its own production as part of a general reduction involving both the OPEP producers and non-OPEC (notably Russia). But many market participants believe that the likelihood that it be translated & # 39; effective action reduced by political developments.
Trump led a Twitter campaign calling not only to lower prices of oil but also for the general Saudi Arabia specifically to avoid any action blocking trend & # 39; below. The credibility of & # 39; efforts & # 39; Trump has reinforced its decision to refrain from taking action against Saudi Arabia on the murder of journalist Jamal Khashoggi. Now received a pass from Trump, it is difficult to think that the top Arab officials take explicit action to raise oil prices.
All this means hard returns on short & # 39; time for oil prices. Besides the lack of & # 39; support both demand as well as supply fundamentals, the market must navigate the weakness of & # 39; Other anchor & # 39; stabilization: the coordination of OPEC with Russia and other producers to balance production and current use at higher prices. These developments also indicate a longer outlook on & # 39; long-term, to confirm a change in & # 39; & # 39 important aspect; where and how the role of producer & # 39; swing is followed.
After exhausting practical approach at the end of 2014 and withdraw from the main function of the OPEC producer, Saudi Arabia has resumed its position & # 39; traditional leadership two years but with & # 39; changes operating adding the short term efficacy of & # 39; this role & # 39; price stabilization. These changes included increased coordination with Russia and some other non OPEC, and more flexibility within OPEC. But the position of & # 39; the oil cartel as a producer & # 39; swing is affected by the increasing influence of & # 39; the United States.
With its highest and most vocal views on prices, increasingly US is asserting its role as a producer & # 39; Swing de facto to the oil market, and b & # 39; so weaken the traditional role of OPEC. And b & # 39; difference from OPEC, an important part of the role of & # 39; America – actually assumed by the production of the private sector shale sector and devoid of direction or public sector intervention – is followed by & # 39; a different way, suggesting major changes on a typical cycle cost. Remember, the production of shale and investment tend to react to price changes by & # 39; length & # 39; longer (although it declined slightly in & # 39; the last years).
To grasp the dynamics of prices that result, the participants in the oil market should familiarize themselves with & # 39; informal by Theorem & # 39; twine, once approach was very popular to explain movements prices in the commodity sector, b & # 39; in particular agriculture.
Simply put, the theorem incorporates remaining & # 39; assess how the production decisions of producers respond to price developments, and highlight why the price can & # 39; with jikkonverġix level & # 39; equilibrium determined by demand / supply determined by & # 39; & # prescribed manner and at 39, during which. Not only the price level & # 39; equilibrium takes time, but in & # 39; some cases can & # 39; issue for a period leading to wild price fluctuations and any potential infringement for both suppliers and consumers.
The implications of a sharp decline in the prices of oil last week go beyond the usual range of & # 39; economic and market influences. The reduction also provides insight into the gradual structural changes experienced by market plays an important role in & # 39; wide range & # 39; of & # 39 decisions; production, investment and consumption.
Mohamed A. El-Erians is a columnist of opinion & # 39; Bloomberg. It is the main economic advisor & # 39; Allianz SE, the parent company & # 39; Pimco, where he served as CEO and co-CIO. His books include "The Only Game in Town" and "When Woo Markets."