What’s happening with the oil prices in 2016?

At the beginning of 2016, the oil price reached the minimum of the last 11 years and in January, the Brent oil price, considered the benchmark in Europe was plunged to the lowest level in 12 years. Likewise, the US crude oil price. In addition, European shares fell the most since August 2015, in the context of the turmoil on financial markets in China.

Brent fell by more than 5.3% to just over $ 32 and US crude up 5.5%, increasing to 32 dollars per barrel. Quotes are the lowest since 2004, when oil was reeling after the tragic September 11th incident.

Causes for the oil price drop

The turmoil in China, where stock markets were closed for the second time during the first week of January, was the main factor for the decline of the oil price.

The oil barrel of benchmark for the Organization of Petroleum Exporting Countries was quoted in February 2016 at $ 29.71, down below the level of 30 dollars for the first time after 5 April 2004.

Because of this depreciation, the prices of the “black gold” of OPEC maintained their sharp downward trend, influenced by political tensions between the two partners of the organization, Iran and Saudi Arabia, which have given reasons for fears of a rise in prices.

Excessive oil supply in the market and uncertainties surrounding the evolution of the world economy, enhanced by recent declines in Chinese stock markets continue to be the main factors affecting oil prices.

A new decline in oil prices was registered just a couple of days ago, after the assaults form Brussels. The price of oil fell on March 22, after bombings in Brussels have led investors to turn to “safe haven” values like gold and the Organization of Petroleum Exporting Countries said that Libya, a country member of OPEC, will not attend the next meeting where they will discuss a possible freezing of the supply, Reuters informs.

The Russian crisis

Russian Prime Minister Dmitri Medvedev declared in January 2016 that all ministries and state structures will have to cut spending and reduce their staff to deal with the crisis triggered by the oil price in Russia.

He urged all public institutions to submit proposals to reduce the budget and the number of employees, transmits the EFE agency. Medvedev also said that the implementation of new projects will be postponed or canceled. Also, to bring new revenue to the budget, some state companies will be put up for privatization.

The Russian Prime Minister spoke about the importance of measures designed to reduce the dependence of Russia to the evolution of oil prices, product which, along with natural gas (whose price is linked to that of oil) provides the bulk of Russian exports and half the proceeds from the budget.

Predictions regarding the oil price in 2016

Prices of crude oil will increase by 50% by the end of 2016, and on the New York Stock Exchange it will be traded on average 46 dollars per barrel in the fourth quarter, while London will be 48 dollars per barrel, says a document of financial services group Goldman Sachs, quoted by Bloomberg.

In the last six weeks, oil prices rose nearly 50% to reach the highest level this year, which prompted many who were betting against the market to reconsider their positions.

Unfortunately, the recent decline following the bombings in Brussels is throwing some shade on the optimistic prognostics from February regarding the oil price. It’s difficult to say what the nearest future brings. Some say, that we will all have to deal with a new recession period, while others believe that there is still hope that the oil prices will recover.

Damage control strategies

Oil prices go up and down for a few weeks now. News about cutting production are contradictory and Saudis announced they no longer expected an agreement with Iran on this issue. However, the Saudis take their precautions and buy more and more refineries, a sign that they will focus increasingly on processing oil, an industry where profit margins are higher.

Oil companies that have wells and refineries in the portfolio, had significantly lower losses than those which were based strictly on extraction.

For example, Saudi Arabia has a refining capacity significantly lower than the extraction, but for some time now, officials there show signs that the state’s strategy for oil companies will change. The best example is the intention to buy a refinery located in the United States that has a refining capacity of 600 thousand barrels per day.

Early this year, officials from Aramco, the state oil company in Saudi Arabia announced that they will buy a majority stake in one of the largest refineries in China, whose refining capacity is of 400 thousand barrels per day.

This would be expanded in the coming years and if the two acquisitions are confirmed, the refining capacity from Aramco could exceed 4 million barrels per day, slightly more than 70 percent of daily production. In fact, Aramco is the largest oil company in the world, producing over 12 percent of the oil that is consumed worldwide.