Soaring Oil Prices and Factors that Trigger it
energycioinsights

Soaring Oil Prices and Factors that Trigger it

By Energy CIO Insights | Thursday, July 25, 2019

The oil and gas market tends to go out of balance because of various phenomena. But, hoarding in times of crisis is a critical factor that rockets the rates to a shy high value.

FREMONT, CA: To hoard is an effectively rational behavior and is a challenge to regulate. The primary reason for hoarding is pertaining to uncertainty. Hoarding is carried out when the availability of a product/service/object is ambiguous. An oil refinery without a steady supply of oil, or one receiving oil from an unaccountable source, will create a need to stock-up or inventory on hand to balance out the fluctuations in supply.

Frequent tanker attacks are unlikely to affect changes on the prices and the extremes, damaging attacks on oil fields can send them soaring naturally. Even low-level violence can result in all stages of the oil and gas industry to retain the maximum number of barrels. Without any spare capacity, the demand would put inexorable pressure on the price.

A trump card that plays a significant role in this scenario is those national oil companies which enact as both importers and producers overseas. In the 80s, oil imports to India and China were less than one percent, while the U.S. was close to 20 percent. At present, India and China import about one-quarter of the traded oil, while the share of the U.S. has gone below 10 percent. As state-owned firms control both economies, companies will tend to hold on to any surplus oil they possess in a crisis rather than balancing then market as international firms.

When discussed further, the Chinese companies are generating about two mb/d overseas at present. Out of which, some are sold off to immediate market or swapped to benefit from arbitrage economic conditions. And in times of oil crisis, the government will unlikely discourage its manufacturers from unleashing any oil onto the open market.

There is a consistent danger that persists in case of hoarding, creating panic and sending prices soaring above the capacities of the market. Balancing of the market is the only way to handle scenarios of hoarding, and international policymakers are the only ones that can do it. 

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