Opinion
Understanding and managing markets in an era of increasing uncertainty
Significant price swings in crude oil put profits and operations in jeopardy. Lauren LaFronz looks at the factors that cause this extreme volatility and the urgent need for technology solutions that manage and mitigate risk.
Las significativas fluctuaciones en el precio del crudo ponen en peligro las ganancias y las operaciones. Lauren LaFronz analiza los factores que causan esta volatilidad extrema y la necesidad urgente de encontrar soluciones tecnológicas que gestionen y mitiguen el riesgo.
Enorme Schwankungen der Rohölpreise gefährden Gewinne und Betriebe. Lauren LaFronz untersucht die Faktoren für die extreme Unbeständigkeit und den dringenden Bedarf an technologischen Lösungen für Risikomanagement und -minimierung.
O
il is a very popular commodity due to its high consumption levels and versatility as a key component
in numerous products including fuels, chemicals, and plastic items. According to the International Energy Agency, close to 90 million barrels are used globally every day. Tis makes it the most widely traded commodity, both physically and financially, around the world. However, high consumption and
versatility are not the only things for which oil is well known. Mention the oil markets, and it’s a good bet that volatility and its cousins instability and unpredictability are among the first things that come to mind for many people. Te oil market is highly complex, with multiple fluctuating supply and demand side variables including geopolitical issues, new oil sources, and speculative trading that contribute to oil’s extreme volatility. Tis volatility significantly increases risk exposure and makes price clarity elusive for producers, refiners, merchants, and
traders. Te most recent price outlook from the US Energy Information Agency reflects this situation: its forecast for 2035 ranges from a low of $50/bbl to a high of $200/bbl.
Geopolitical risk Supply disruptions due to geo-political issues have become relatively frequent events, causing significant price spikes as the delicate supply – demand balance is thrown off kilter. Issues in the Middle East in particular have a large influence on oil prices because of the region’s massive reserves. For example, take the Arab Spring, which caused crude output to fall quickly and significantly. Oil prices rose from $92 per barrel in January, 2011 just prior to unrest in Tunisia, to $120 per barrel in April after violence erupted in Libya. Outside of the Middle East, political issues in other important supply regions are creating additional market uncertainty. In Latin America, the trend towards greater nationalisation of private investment in energy production has had a detrimental impact on output, while in Russia, difficult business conditions have reduced the expertise and investments required to continue the development of production infrastructure. And in Argentina, a nascent nationalisation programme threatens at least part of the country’s 700,000bbl/day production.
Shale oil Shale oil has enormous potential, with US reserves totalling 1.5 trillion barrels of oil – more than five times the stated reserves of Saudi Arabia. According to an International Energy Agency forecast, these shale reserves will help the US become almost self- sufficient in oil by 2035. However, they currently remain largely untouched because extracting oil from shale is expensive and complex. Tat is, for now.
Fig. 1. The value oil chain. 6
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