Oil Drop and Price Expectation

July 2, 2015 by

After the recent drop in oil price all the way from 2014 high of $107 to $43 in January 2015. Prices rallied back to $61 sometimes in March. The major reason for the drop in oil price can be attributed to supply glut caused basically by shale production mainly in the United States of America. The united is the largest consumer of oil in the world, US consumes 20.5 million barrels per day. They are also the biggest producer, producing 12.4 million barrels per day.

The oil market has been flooded with excess supply of oil from OPEC members and non-members. This explains the fundamental basics behind the oil price plunge. The US shale is the major shale oil producer which has flooded the market. This can be attributed to advancement and innovation in science and technology. The shale production coupled with supply from Russia and other OPEC countries has led to current problem of excess supply. From the demand side, Innovation has actually led to a fall in demand for oil. Cars for example are now powered using synergy. Also, electricity is now powered using solar and wind energy. The world is trying to go green which means less of burning fuel (coal) and a switch to clean energy. All these have actually stalled the consumption of crude oil globally.

Some Economic factors are also responsible for the fall in oil price; the value of USD has appreciated massively against all major currencies. This has weighed down the price of oil and other commodities such as gold. The USD has gained so much strength after the end of Quantitative easing and the market is expecting a rate hike from the FED before the end of the year. Investors and traders are already channelling investments into USD and holding the currency for longer than expected. This has given the currency so much boosts in terms of value. The Chinese economy is also slowing down at the moment. This has an impact on the demand for commodities such as oil and metals in terms of demand. Greece tumour also seems to be weighing down oil prices on fears of possible crisis.

Politically, the market is also betting on the outcome of a possible Iran nuclear deal. This will add to the already existing supply glut. There are possibilities of a deal to be reached and Iran is likely to be supplying oil to the market. This might be early 2016.

The fall in price has been of great benefit to consumers. Consumers now have more disposable income from saving on fuel prices. This has also drag down inflation figures in all major economies. Inflation figures in the Eurozone went down to negative. The government of oil producing nations are mostly hit by the fallen oil prices. Countries like Venezuela, Nigeria etc. are all struggling to balance their budgets because of so much dependency on oil revenues which is more than 60% of their annual income.

If OPEC continues to leave output unchanged and Iran gets a deal which will lift their embargo to supply oil. We should expect more downside on oil prices. Oil producing countries that depends so much on oil revenue might eventually put up their voice at OPEC to curb output.