Brent oil futures price, which exceeded 100 USD at the beginning of 2011, were around 110 USD until the mid-2014 and rarely exceeded 120 USD. Brent crude oil has dropped sharply since June of 2014, reaching 40 USD in August 2015 and below 30 USD in January 2016. Brent crude oil, settled in the range of 45-53 USD after this fall, was fluctuating in this range for more than a year. Brent crude oil which bottomed out with 45 USD in June of this year, has been rising since then. It has soared in the last few months and surpassed 63 USD, reaching highest level since June 2015. Over the past 6 years, West Texas Intermediate (WTI) and Dubai/Oman crude oils, other important crude oil benchmarks, have shown parallel trends.
Oil prices have been declining since mid-2014 because of rock oil production in the US, the rapid rise in supply and inventory levels and lower demand, which was highly affected by China’s growth rate, lower than expectations and its potential. In 2017, this equilibrium started to reverse. In last few months, crude oil prices have gained momentum as news create pressure on oil supply level.
Why have crude oil prices soared recently?
After 2014, Organization of Petroleum Exporting Countries (OPEC) have reduced supply levels against falling crude oil prices. OPEC is expected to prolong supply cut which will end in March 2018 to the end of the year. In last few months, statements and news in favor of supply cut came from Saudi Arabia and Russia supported these statements. With impact of these news and corruption operations in Saudi Arabia, it is expected OPEC to extend supply cut and to keep crude oil supply at low levels. On the other hand, crude oil demand is expected to increase further in next years, with the lead of emerging markets. Despite rising demand, increasing possibility of crude oil supply to not rise in the same amount has putted pressure on the crude oil prices in last few months.
With the disequilibrium in supply and demand, the recent political uncertainties have supported price increase as they are perceived as a threat to oil supply. The effects of Yemen crisis on Iran Saudi Arabia relations and the increased possibility of interruption in the export of northern Iraq crude oil due to referendum caused pressure on oil production and supply in the Middle East. Along with these news, Venezuela announced that it would restructure its debts, an announcement increasing its bankruptcy risk which might affect crude oil production. Finally, the Nigerian terrorist organization, Niger Delta Avengers, who had attacked oil refineries before the ceasefire was declared, announced that they canceled the ceasefire, threatening oil supply.
In addition, US rock oil production will affect supply demand equilibrium and crude oil prices in future.
What are the effects of rising crude oil prices on Turkey?
As Turkey is an energy importer and as energy import has an important portion of Turkey’s foreign trade, crude oil prices are among the topics which should be closely monitored by both decision makers and companies. The rise in crude oil prices pushes up energy import in USD terms and puts upward pressure on the current account deficit. In 2018, if the growth targets set in Medium Term Program (MTP) are realized and the average price of barrel of Brent crude oil rise to 65 USD (expectation in MTP is 54,5 USD), crude oil imports may exceed expectations by 2,2 billion USD. This means that Turkey will pay more for the same amount of oil and the pressure on the current account deficit will increase. Also, increasing crude oil prices may put upward pressure on energy costs of production and may cause cost inflation.
In addition, rising oil prices have an impact on many sectors. While, energy costs are rising for all sectors, sectors using oil as raw material (plastic, rubber etc.) and sectors using oil as fuel (aviation, logistics etc.) may face rising raw material costs. An increase in logistics cost may indirectly put pressure on many sectors and companies. Moreover, the pressure of high oil prices on the purchasing power of households may have negative effect on domestic demand, GDP growth and company profits
The depreciation of TL against USD has caused both crude oil prices to increase further in terms of TL and adverse effects to be felt even more. For this reason, declines in crude oil prices in USD terms, reflect partially to TL prices. On the other hand, increases are even higher in TL terms. This situation negatively affects energy and gas prices. When crude oil prices rise, energy and gas prices rise more than they
drop when crude oil prices drop.
Note: All data and commodity prices mentioned in this article are belong to 10 November 2017 and earlier.