Oil is the most important commodity on the planet, but it is also the most difficult to make accurate future price forecasts for. The reasons for this include geopolitical issues, an extremely diverse supply base and traditional supply and demand issues.
In recent years, this has meant that analysts continued predictions saying oil prices will fall to under $100 have yet to materialise. In what will come as welcome news to the regions major oil producers, 2014 looks like it will be another year when bearish forecasts for the oil price are wrong.
In 2012-13, many oil analysts thought the commodities super-cycle, which started in 1999, was about to end and that the oil price could enter a 20-year decline. The North American shale gas boom has contributed to significant non-Opec supply growth, and many believed this would apply significant pressure on the oil price and send it to the $95 a barrel mark.
However, this has definitely not materialised, with the latest estimate for the 2014 forecast average crude price by the US-based Energy Information Administration (EIA) coming in at $104.88. This would represent a fall of $3.53, or 3.25 per cent, on 2013 prices, a figure that major oil producers will be extremely happy with.
Most economies in the Middle East rely on oil and gas exports, and the vast majority of government revenues in the GCC and outer Middle East derive from this one source. So while it is almost certain that 2014 will end with the oil price in triple figures, the mid-term outlook is not as bullish.
Non-Opec crude production looks set to grow by 1.9 million barrels a day (b/d) in 2014, fuelled by North American non-conventional oil and gas. Coupled with this, Opec production is also rising considerably and this is what should be causing alarm.
Iraq continues to ramp up its crude production and is now pumping 3.6 million b/d, its highest level in 35 years. Reports in Iran indicate the Islamic Republic is also wasting no time in raising its oil exports to as much as 1.4 million b/d in the second quarter of 2014, after signing an interim agreement to halt its nuclear programme in late 2013.
Whether such a large increase will be tolerated by countries such as the US will depend on how quickly a permanent deal can be reached regarding Tehrans nuclear ambitions. However, the signs indicate Tehran is capable of pushing exports to pre-sanction levels of 2.5 million b/d.
Saudi Arabia is likely to ease its production from about 10 million b/d to just above 9 million b/d to allow for other Opec member states to increase their output. However, with Libyas production more than 1 million b/d lower than its usual level, there is only so much Riyadh can do.
Historically, the oil price has decreased drastically when Opec has significant spare capacity. Current geopolitical issues mean this is not yet the case, but if this changes then the bearish forecasts of 2012 oil prices in the $85-95 a barrel range are likely to become a reality.