Plummeting crude prices? Here is the reason why.

Source: International Energy Agency

The global crude oil prices have been plummeting for the last 1.5 years. Brent crude prices were at $110 a barrel just as recent as June 2014, a far -cry from today’s price of $30 a barrel, which was last seen in 2003.  Simply, the supply of oil exceeds the demand. The World is producing far more than is needed.

The scenario was different 7 years ago. Global oil demand rose in the period of 2010 – 2014, although production was far less. The increased demand and short supply allowed the prices to soar. This was because conflicts arising from the Arab spring led to restricted supplies, causing prices to rise to as high as $100 a barrel. Furthermore older fields were stagnating due to depletion.

The combination of depleting reserves and increased costs spurred innovation which saw more drillers using new approaches such as fracking and horizontal drilling to access vast quantities of oil from shale formations. The fracking boom has doubled US crude oil production since 2010 and has been used in North Dakota and Texas. Furthermore improved enhanced oil recovery methods (EOR) have also allowed for vast quantities to be unlocked from depleting reserves and tar sands.   The innovation pushed supply to catch up with the demand and even exceeding it. This sparked the crash.

By around June 2014, the global oil demand was starting to taper off. Furthermore, Iraq, and Libya resumed producing more oil. Chinas economy (the world’s largest energy consumer) became uncertain while Europe was still involved in the Eurozone mess.

As prices started to fall, Saudi Arabia and other OPEC members did not cut back their production as would have been anticipated. Instead, it increased production for purposes of maintaining the market share. In the hope that the tumbling oil prices would discourage the US fracking technique.  Surprisingly the frackers seem to be adapting even with prices as low as $30 per barrel, although some analysts say that this would no longer be sustainable below $25 per barrel.   This has been largely due to companies adopting cost cutting measures in order to continue producing. Also Iraq’s production has doubled its production whilst with the lifting on Iran’s nuclear sanctions, it is expected that Iran will begin to export more oil, adding to the oil glut.  From an economic perspective, as long as the supply exceeds demand, prices are expected to stay low.

This is good news to the consumer as most drivers are enjoying low pump prices, hence more disposable income.  However, producers such as Russia and Saudi Arabia are getting affected with falling oil revenues. Oil companies are no longer enjoying the oil profits that were being observed between 2010-2014, and some are just barely surviving.  Thousands of jobs have been lost within the oil and gas industry and ripple effects can be observed in other related sectors.

So what next?

Some analysts are projecting that the oil prices will continue tumbling to around $20. Some have made predictions of even as low as $5 – $15 a barrel. However, optimists expect the prices to recover to around $40-$50 as frackers taper off their supply.

Technological developments are still being made although a halt has been put on less mature technology. Exploration activities within relatively new territories are also being halted until the oil prices recover. Some companies are even spreading their risk, by selling off their shares.

In the meantime people are banking on 3 possibilities which would cause the oil prices to spike.

1.   A cold war between Iran and Saudi Arabia which could potentially lead to interruptions, hence reducing production.

2.  If the US frackers are no longer able to sustain the low oil prices, causing them to cut back on production.

3.    A rebound of China’s economy.

However, it is also anticipated that the low prices could persist for longer than expected. It is just a matter of time.

-Source; VOX , Energy Voice , OilpriceBIDNESSETC

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