Oil Prices: On the Brink of a Comeback?

Supply and demand is perhaps the most fundamental concept and the main driver of the market economy. Oil prices have been in a major slump since 2014, and while the current price of $45/bbl  is undoubtedly a strong driver in rebalancing the market, everyone is wondering just when market equilibrium will be restored.

Fearful of losing their investments due to the historically low oil prices reflecting our current market, companies have become discouraged and in result have slowed production. Capital expenditure cut backs are projected at $180 billion over the next couple years and have diminished by 20% in 2015 alone, meaning that there will be less projects to replace the dwindling supply of existing fields. From an economic standpoint, this trend will result in fewer oil producing fields, causing a decrease in supply and in turn, higher prices. However, there are other factors that need to be considered that will influence this theory.

OPEC (Organization of the Petroleum Exporting Countries), mainly Saudi Arabia, has played a significant role in the downward spiral of oil prices over the past couple of years. This “price war” has contributed to roughly a 10% decline in oil prices. While OPEC historically has helped steady oil prices by ramping up or withdrawing output, they now seem to be more concerned with increasing market share and mitigating shortfalls in revenue. OPEC is overproducing loads above demand with production up 50% from 2012, and although OPEC has stood firm in its decision to continue overproducing, it is still undecided as to whether that will continue on due to budget constraints and severe financial crisis.

With China surpassing the United States as the world’s largest importer of crude oil in April of this year, their economic trajectory will certainly be a major influencer on oil prices. The U.S. Energy Information Administration (EIA) estimates that China will consume 3 million more barrels per day in 2020 than they did in 2012. However, China’s economic slowdown over the past months has led to uncertainty about future oil sales and as a result, declining prices.

Other factors like American shale production and geopolitical disturbances such as Iran's nuclear deal and Russia’s military interference in Syria also bring uncertainty of what’s to come.  Regardless, the global oil supply and demand curves will cross eventually and while there is likely no good news in the short term, the next year will hopefully bring increasing stability.

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