What’s Up with Oil Prices Going Down?

The fact that oil prices vary on a daily basis is unlikely to be news to any of us, but the speed with which those prices fell through the past nine months has surprised many – even the experts.

To better understand what’s been happening, you have to go back to the early 2000s…

In around 2005 global demand for oil surged, especially in the developing economies of China and India, and prices soared until they were up above $100 per barrel. Those higher prices in turn led oil companies to open up harder-to-reach oil fields and to start using more complex techniques such as fracking and horizontal drilling in the US and oil-sands extraction in Canada. Soon North America was producing an unprecedented quantity of oil, but supply was still barely keeping up with demand thanks to conflicts in Libya and Iraq and sanctions in Iran. By 2011 prices had reached the low $100s; they were to peak in June 2014 at $115.

But then things began to change. Economic slowdowns in Asia and Europe and general improvements in fuel efficiency in vehicles led to a sudden fall in demand while production was still rising. Libyan oil production recovered faster than expected and production in Iraq and Syria proved more resilient to conflict than many had thought possible. Prices fell steeply so that by mid November 2014 they were down to a staggering $80 per barrel. The oil world held its breath and waited for the OPEC summit in late November.

OPEC produces 40% of the world’s crude and many thought they would vote to slow production in order to force the price back up. On November 27, however, the OPEC leaders voted to do nothing for 6 months. They would wait and see. Oil prices fell amost immediately and by mid December they were below $60 per barrel. That same month the Saudi oil minister said that prices could fall to $40 or even $20 a barrel and still he would not cut production. By January the market price for a barrel of crude was $50.

OPEC, like the rest of the world, is still watching and waiting. Of particular interest is North American production – as prices tumble smaller companies are failing, credit lines are not being renewed, and for some it is simply no longer cost effective to continue. It was reported on April 1st that US production had fallen in the second half of March and production may have peaked. If so prices may begin to rise again. Indeed, at the time of writing a barrel of crude is priced at $51.63, up from $44.84 in mid March. If the supply trend continues to fall, the price trend would continue to rise. But what will happen when sanctions are lifted in Iran? Will Saudi Arabian action in Yemen affect supply? What of the ever-growing unrest in the Middle East as a whole? What of the effect of renewed growth in Asian economies?

There are so many questions and so few answers. If only it was as easy to predict the future as it is to review the past.

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