The popular idiom ‘What goes up must come down’ can now be associated with oil. The price of oil has now fallen for nine straight weeks, the longest losing streak since 1991. The last time we saw oil crash to around 40$/barrel was in 2009 helped on by the Great Recession. Prices tanked as speculators sought to cover their position in a world were credit had dried up. The supply demand equation never popped up on anyone’s radar.
Fast forward to 2014 and we see another drop in prices. So what has changed this time round? The Shale revolution has changed the dynamics of the great game. A combination of higher oil prices and technological advances made it possible to extract oil from deep rocks at costs that ensured that the producer made a profit. The Peak oil theory for the time being has been kicked down the road.
The drop can be attributed largely to 3 factors:
The US helped on by the shale revolution has averaged an estimated 8.9 million barrels per day in October 2014 which is the highest level of production in the past 27 years. To give you some context as to how big the increase has been, this chart from daily signal will give you some additional perspective.This is one of the major reasons as to why with all the conflicts in the Middle East prices continue to trade lower.
The recent decision of OPEC not to cut production is to be seen in the light of the shale revolution. The idea is to make it painful for the US oil producers to pump out more oil. The breakeven price for most of the US producers is at around 70$/80$ and a sustained drop in prices will ensure they shut shop and also hit lenders who have lent them money.
So who will blink first? For the OPEC countries it’s cheaper to extract oil when compared to the rest of the world but here in lies the issue, these countries also need higher prices so as to balance their budgets. The Arab spring ensured the rulers in these countries had to keep their public happy so that they did not face an unhappy ending . Non OPEC countries like Russia are already facing a full blown recession partly due to the drop in prices and also due to the sanctions imposed by the EU and US due to the war in Ukraine.
So what happens next? We will continue to see a drop in prices in the near-term until the supply overhang is erased. It’s to be noted that a regime change in the Middle East or a pickup in economic growth around the world can push the prices up again while any positive news around Iran’s sanctions or peace in Iraq/Syria could push down the prices. None of these seem likely to occur in the near future so until then gravity is what oil will continue to face.
Fast forward to 2014 and we see another drop in prices. So what has changed this time round? The Shale revolution has changed the dynamics of the great game. A combination of higher oil prices and technological advances made it possible to extract oil from deep rocks at costs that ensured that the producer made a profit. The Peak oil theory for the time being has been kicked down the road.
The drop can be attributed largely to 3 factors:
- Weakness in economic growth in Europe
- Weakness in economic growth in China
- And lastly the elephant in the room being the supply of oil from the US
The US helped on by the shale revolution has averaged an estimated 8.9 million barrels per day in October 2014 which is the highest level of production in the past 27 years. To give you some context as to how big the increase has been, this chart from daily signal will give you some additional perspective.This is one of the major reasons as to why with all the conflicts in the Middle East prices continue to trade lower.
The recent decision of OPEC not to cut production is to be seen in the light of the shale revolution. The idea is to make it painful for the US oil producers to pump out more oil. The breakeven price for most of the US producers is at around 70$/80$ and a sustained drop in prices will ensure they shut shop and also hit lenders who have lent them money.
So who will blink first? For the OPEC countries it’s cheaper to extract oil when compared to the rest of the world but here in lies the issue, these countries also need higher prices so as to balance their budgets. The Arab spring ensured the rulers in these countries had to keep their public happy so that they did not face an unhappy ending . Non OPEC countries like Russia are already facing a full blown recession partly due to the drop in prices and also due to the sanctions imposed by the EU and US due to the war in Ukraine.
So what happens next? We will continue to see a drop in prices in the near-term until the supply overhang is erased. It’s to be noted that a regime change in the Middle East or a pickup in economic growth around the world can push the prices up again while any positive news around Iran’s sanctions or peace in Iraq/Syria could push down the prices. None of these seem likely to occur in the near future so until then gravity is what oil will continue to face.