There is much speculation surrounding the oil price. Today the price of Brent Crude has fallen below $30 a barrel for the first time in twelve years. This was pre iPhone and FaceBook days and when gold was $400 an ounce if anyone wants a time marker. However, despite the advances of social media, gold now being above $1000 per ounce and massive cut backs in costs by the industry leaders, it is doubtful that crude will stay at this price. Many economists predict that it still has at least another $10 to fall, questioning only how quickly this will happen. This really does pose a lot of questions, not least why the drop in price. For many that answer is fairly simple – supply and demand.
Between 2010 and 2014 oil demand was soaring around the world, as countries recovered from the financial crisis, but global production was struggling to keep up. Many older oil fields were stagnating. Conflicts in places like Libya and Iraq were restricting supply. Countries had to draw down their stockpiles, and prices soared to around $100 per barrel. Add into the equation for instance that US crude oil production has nearly doubled since 2010. Eventually, supply caught up with demand — and then surpassed it. That’s when the crash came.
By mid-2014, global demand was starting to slow down. Europe was still reeling from the eurozone mess. China’s economy was starting to stumble. But the United States was still producing more and more oil. Iraq and Libya were also starting to bring back more production. So prices began sliding. many people expected Saudi Arabia and other oil producers in OPEC to cut back on their own production to prop up prices, as they have in the past.
Surprisingly, that didn’t happen. Saudi Arabia decided to increase production in order to maintain market share, hoping that the subsequent fall in oil prices would crush other oil producers such as US frackers, who require higher prices to stay profitable. Major developing countries like China and Brazil have been in a slump, putting a damper on oil consumption. That’s the basic dynamic. As long as supply far outstrips demand, oil prices will stay relatively low.
With reserves at record levels, investment banks are revising their already pessimistic forecasts lower. Morgan Stanley has become the latest bank to predict prices would fall to $20, while Royal Bank of Scotland forecast for markets is a low of $16 – and Standard Chartered said the market could reach $10. They also commented this is when most of the money managers in the market would concede that matters had gone too far. I always thought it would not be long before this sector would get involved. A concern over bonuses no doubt will prompt some serious action just as a shaky economy of the world’s biggest producers will force some action. It’s a shame that people involved in Oil and Gas have lesser effect on their futures.