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Crude oil: A peek in history - Views on News from Equitymaster
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  • Mar 27, 2003

    Crude oil: A peek in history

    The US invasion of Iraq has increased suspicions of prolonged war. This and the continuing violence in Nigeria, which has led to shutdown of 40% of the country's oil production, has been the major reason of the increase in crude oil prices internationally. Yesterday, the Brent crude oil prices increased by about 79 cents to US$ 26.9 a barrel.

    Last week, oil prices fell by about 25%, largely because of perception of short war. But the prolonged one-week of war has increased concerns of a long war which was ultimately seen as rise in the crude oil prices. This has led us to go back to history to study the causes of the increase in crude oil prices internationally.

    The year 1990 saw crude oil prices soaring (up to US$ 33 per barrel) on account of supply disruptions due to Iraqi invasion on Kuwait. The loss in capacity by US refineries added to spurt in prices. After the Persian Gulf war ended, oil markets remained stable during 1991-1993, when the crude prices hovered in the range of US$ 16- US$ 19 per barrel. Then towards the end of 1993, the oil prices plunged to around US$ 13 per barrel. During this period the OPEC production had reached the highest over the decade. Also Kuwait had boosted its production levels.

    In 1994, workers disrupted oil production in Nigeria. Also the extremely cold weather in US and Europe during this time led the oil prices to increase to the levels of US$ 23 per barrel.

    In 1997, OPEC raised its production ceiling by 2.5 m barrels per day (m b/d) to 27.5 m b/d, a first in the previous four years. This apart, in 1997, the world oil supply saw the largest annual increase since 1988. Oil prices continued to plummet till the start of 1999 to reach a level of US$ 10 per barrel. This was mainly because of increased production from Iraq coinciding with no growth in Asian oil demand (due to the Asian economic crisis) and an increase in world oil inventories following two unusually warm winters.

    However, the oil prices tripled between January 1999 and September 2000 to US$ 30 per barrel due to strong world oil demand, OPEC oil production cutbacks, and other factors, including weather and low oil stock levels. Post that, again the oil prices fell due to weak world demand and OPEC overproduction. The 9/11 incident led to a further southward journey of crude prices due to the fear of further downturn in the global economy (around US$ 16 per barrel).

    In 2002, crude oil price rose mainly because of the reduced production by OPEC and to a lesser degree, fears about the military tensions in Iraq. The crude oil price at the start of the year was around US$ 16 per barrel and currently it is around US$ 27 per barrel.

    It has been observed that oil prices tend to be impacted on a short-term basis due to supply disruptions by major oil producing countries, political actions and strikes. But over a long term, crude oil prices are largely based on long term fundamentals like availability of energy resources, technological improvements and global economic growth. Once normalcy returns to the Middle East, the fundamentals will again drive the price of crude oil.



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