The
history of oil industry is full of booms and busts; the latest downturn is the
deepest since 1990s starts from Jun 2014. The price of oil has been cut roughly by more than 60 percent since the
June 2014. Crude oil prices tried to recover few times last year but a barrel
of oil has sunk to its lowest level since 2004.
Current oil prices
The main international crude oil benchmark “Brent Crude” was
traded below $30 a barrel on Friday.
Indian, MCX crude oil price closed at 1996 on Friday.
KEY REASONS BEHIND
CRUDE OIL PRICES DROP
Crude oil is just like any other commodity is regulated by
simple economic rule of “Demand and Supply”. The demand of energy in particular
country is very closely related to its economic activities. The recent fall in the price of oil from $106
in June 2004 to less than $30 per barrel can be attributed to 4 main
reasons.
- Global Petroleum and other liquid Production
- Global Petroleum and Other Liquids Consumption
- Organization of Petroleum Exporting Countries (OPEC)
- Stronger US Dollar
Energy Information Administration (EIA) estimates that global
oil inventories increased by 1.9 million b/d in 2015, marking the second
consecutive year of inventory build.
This oversupply has contributed to oil prices reaching the
lowest monthly average level since mid-2004. Inventories are forecast to rise
by an additional 0.7 million b/d in 2016, before the global oil market becomes
relatively balanced in 2017. The first draw on global oil inventories in 15
consecutive quarters is expected in the third quarter of 2017. Below mentioned
chart describes “world liquid fuels
production and consumption balance” over the years.
United States a largest crude oil consumer increased its
domestic production from Shale formations by using Hydraulic Fracturing
technique. US crude oil production has nearly doubled since 2010. Though it does
not export crude oil, it now imports much less, creating a lot of spare
supply. Saudi Arab, Nigeria and Algeria, who were selling crude oil in the
United States, suddenly competing for Asian markets, and the producers are
forced to drop prices.
Global Petroleum and Other Liquids Consumption
While global supply of crude oil is increasing, demand for
crude oil is decreasing due to weakening economies of Europe and developing
countries such as China.
Energy Information Administration (EIA) estimates global
consumption of petroleum and other liquid fuels grew by 1.4 million b/d in
2015, averaging 93.8 million b/d for the year. EIA expects global consumption
of petroleum and other liquid fuels to grow by 1.4 million b/d in both 2016 and
2017. Forecast real gross domestic product (GDP) for the world weighted by oil
consumption, which increased by an estimated 2.4% in 2015, rises by 2.7% in
2016 and by 3.2% in 2017.
Global Petroleum and
Other Liquids Production & Consumption
Production/Consumption
|
2014
|
2015
|
2016
|
2017
|
Non-OPEC Production
|
56.09
|
57.41
|
56.77
|
56.68
|
OPEC Production
|
37.24
|
38.3
|
39.16
|
40.01
|
OPEC Crude Oil Portion
|
30.77
|
31.65
|
32.16
|
32.72
|
Total World Production
|
93.33
|
95.71
|
95.93
|
96.69
|
OECD Commercial Inventory (end-of-year)
|
2721
|
3061
|
3132
|
3131
|
Total OPEC surplus crude oil production capacity
|
2.07
|
1.59
|
1.97
|
1.91
|
OECD Consumption
|
45.73
|
46.28
|
46.63
|
46.99
|
Non-OECD Consumption
|
46.69
|
47.49
|
48.56
|
49.63
|
Total World
Consumption
|
92.42
|
93.77
|
95.19
|
96.61
|
In million barrels
per day
Organization of Petroleum Exporting Countries (OPEC)
Organization of the Petroleum Exporting Countries (OPEC), a
cartel of oil producers, is a leading factor in the sharp price drop of crude
oil as they are unwilling to stabilize the oil markets. Prices of OPEC’s
benchmark crude oil have fallen 50% since the organization decided not to
reduce crude oil production in a meeting held in 2014 in Vienna. Saudi Arabia
clearly told that, it does not want to reduce its market share despite falling crude
oil prices. If OPEC does not cut production, the result is a further oversupply
of oil, placing downward pressure on crude oil prices for the long term.
According to Energy Information Administration (EIA), OPEC
crude oil production averaged 31.6 million b/d in 2015, an increase of 0.9
million b/d from 2014. Iraq led the OPEC production increases. Its production
rose by 0.7 million b/d in 2015. Saudi Arabia also boosted production to defend
its share of the global oil market, with its production increasing by 0.3
million b/d in 2015.
The Strong US Dollar
The strong U.S. dollar has been the main driver for the price
decline of crude oil over the last few years. The dollar is at a 12-year high
against the euro, leading to appreciations in the U.S. dollar index and a reduction in oil prices. This puts the
market under a lot of pressure, because when the value of the dollar is strong,
the value of commodities falls. Global commodity prices are usually in dollars
and fall when the U.S. dollar is strong. For example, the surge in the dollar
in the second half of 2014 caused a sharp fall in the leading commodity
indexes.
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