Over the past three years, we have seen a very interesting rise and fall in the price of oil.
If you take a look at WTI Crude Oil, you’ll see that it rose from lows of below $30 per barrel, to highs of well over $70 per barrel. That’s a phenomenal rise.
However, as you can see on the chart more recently, the price as crashed back towards $50 in a very short period of time. This means it is officially in a ‘bear market’.
This begs the question, what caused that major rise and fall in price? Let’s go through a brief breakdown of the factors at play.
Oil Prices Being Pulled in All Directions
It goes without saying that an important commodity like oil is driven by more than one factor. What makes oil so complex is how closely linked it is to particular geopolitical events, as well as the production supply and global demand.
Therefore, since describing all the factors at play would require an entire book, we’ll just stick with an overview of the main factors in this article.
U.S. Shale Production
We’ll start with US shale production. This has seen a massive increase in output recently. According to the US Energy Information Administration (EIA), US shale production increased by 400,000 barrels per day, just in the first week of November! This pushes output up to 11.6 million barrels per day, a 3.4% increase, in just one week.
Although we expected oil output from the US to rise, when coupled with previous EIA figures released a week beforehand, US output has increased quicker than we expected. This has therefore increased the amount of supply in the market.
Geopolitical Pressure on Production
On top of the US output increases, there has been a deal in the works between Iraq and Kurdistan to re-open disputed oil fields which were disrupted last year, after Iraq reclaimed territory from the Kurds. If a deal goes ahead, it’s been reported to potentially add another 400,000 barrels of supply to the global market.
On the flip side, it was expected that output from Iran would fall. This would have been substantial, since Iran was the 5th largest exporter of oil in 2017 with a 5% share of the global market.
However, OPEC+ production has already been increasing in recent months. This includes Saudi Arabia, United Arab Emirates, Russia and Libya.
President Trump had urged producers to offset losses caused by sanctions against Iran and increase their supply. Although they haven’t been able to fully offset the supply problems from Iran, Venezuela and Angola, the increase has softened the blow and helped to relieve the pressure caused by the U.S. foreign policy.
Global Economic Outlook
Then we have the global economy. Growth has been solid over the past few years, however, the risks are starting to become clearer.
The IMF has downgraded future forecasts globally. The world economic outlook is expected to be 3.7% for 2018 and 2019, down 0.2 percentage points from the July forecast of 3.9%.
The downgrades in global growth are in response to a range of factors. This includes the trade war between the US and China, and weak performance and risks from the eurozone, the UK and Japan.
Rising interest rates are also putting pressure on some emerging markets, causing capital outflows.
In the US, growth is expected to taper off once the fiscal stimulus from last year starts fading. The IMF forecast for US growth in 2019 stands at 2.5%, down 0.3 percentage points from 2018.
What’s Next for Oil Prices?
In response to current conditions, Saudi Arabia is calling for OPEC to reduce output by 1 million barrels per day based on October levels and has committed to cutting 500,000 barrels per day on their own in December.
However, Scott Sheffield, Chairman of Texas-based Pioneer Resources, has said the US could reach 13 million barrels per day fairly quickly and 15 million within seven or eight years. He suggested that the ‘sweet spot’ for oil prices would be around $60 to $80 per barrel.
Essentially, keeping all the points we’ve discussed so far in mind, what we are beginning to see is a build-up in inventories alongside increasing supply; key factors for the sharp drop in oil during 2015.
Expect to see much more talk going on in the coming weeks about cutting supply.