• Thursday, July 25, 2024
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In short-term, prices could drop below $35 a barrel


Crude oil price is now below $50 per barrel. That is nearly 57 percent down from the June 2014 price and it is still pushing toward the depths last seen during the 2008 financial crisis and recession that followed.

New estimates from Bank of America Merrill Lynch put the short-term floor somewhere below $35 a barrel; a drop that would represent a decline of nearly 30 percent from here as the market is oversupplied by about a million barrels of oil per day. Options traders are starting to place bets that prices could fall into the $20s in the months to come.

OPEC is showing steely resolve in its effort to recapture market share from US shale oil producers. Most oil exporting nations want higher prices as their national budgets feel the pinch. For the likes of Russia and Venezuela, the pain is acute and could well result in an outright currency crisis. But none of them want to make the production cuts needed to align supply with the depressed demand that has resulted from economic weakness across much of Europe and Asia.

Oil demand is unlikely to soak up the excess supply anytime soon, with Europe stalled, Japan picking up the pieces from its recent sales tax hike and China still trying to control its runaway housing and fixed-asset investment bubbles without pricking its bad debt problem.

The game changers for 2015

China is the second largest consumer of oil in the world and surpassed the United States as the largest importer of liquid fuels in late 2013. More importantly for oil prices is how much China’s consumption will increase in the coming years. According to the Energy Information Administration, China is expected burn through 3 million more barrels per day in 2020 compared to 2012, accounting for about one-quarter of global demand growth over that timeframe.

By the end of 2014, the U.S. was producing more than 9 million barrels of oil per day, an 80 percent increase from 2007. That output went a long way to creating a glut of oil which helped to crash oil prices. Rig counts continue to fall, spending is being slashed, but output has so far been stable. Whether the industry can maintain output given today’s prices or production begins to fall will have an enormous impact on international supplies, and as a result, prices.

Many pundits have declared OPEC irrelevant after their decision to leave output unchanged, the mere fact that oil prices crashed after the cartel’s November meeting demonstrates just how influential they are over price swings. For now OPEC has stood firm in its insistence not to cut production quotas. Whether that remains true through 2015 is up in the air.

In the not too distant past, a small supply disruption would send oil prices skyward. In early 2014, for example, violence in Libya blocked oil exports, contributing to a rise in oil prices. In Iraq, ISIS overran parts of the country and oil prices shot up on fears of supply outages. But since then, geopolitical flashpoints have had much less of an effect on the price of crude. During the last few weeks of 2014, violence flared up again in Libya. But after a brief increase in prices, the markets shrugged off the event. Nevertheless, history has demonstrated time and again that geopolitical crises are some of the most powerful short-term movers of oil prices.

Frank Uzuegbunam