March 2015Posted Mar 01, 2015
As you know, oil prices have fallen by half over the last 12 months (from $105/barrel to $53/barrel). We wanted to provide you some insights as to why this dramatic drop occurred, and what we expect from the next season.
Why the fall?
Over the last 12 months, oil traders (and speculators among them) perceived the factors that would apply downward pressure on prices (1-3 below) to be much more influential than others that would apply upward pressure (4-5).
1. Record-high global supply (mainly due to increases in oil production in the 3rd and 5th largest world producers -U.S. and Canada; and the restoration of production in Libya.
2. Less-than-expected growth in global oil demand due to slower-than-expected output growth in China and the Eurozone, and increasing shifts towards green energy.
3. Lack of response from OPEC to falling prices due to conflicting interests of its member countries.
4. The threat of interruption in supply by a large world producer, Russia, due to the political standoff between Russia and Ukraine.
5. The possibility of interruption to supply by another top producer, Iraq, due to the the threat by ISIS to take over Iraqi oil sites.
ISIS may still pose a threat, but the Russian conflict is likely to dissolve, and downward factors likely to continue. A possible deflation (fall in general price level) in the U.S. economy, elimination of sanction-pricing due to Russia promising retreat from Crimea, and increased environmental concerns in the case of a Democratic victory in the general elections in the U.S. may encourage the U.S. policymakers to slow down the historically-high production level in the United States â€“causing oil prices to increase slightly in 2015. While oil prices are notoriously hard to predict with precision, we expect more stability in prices in the upcoming season, and we are prepared to negotiate the most favorable prices for you.