Crude Oil Prices Hits Seven Year Lows

Thu, 14 Jan Pre-Open

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Recently, crude oil prices in the US tanked to seven year lows of US$ 33 per barrel. Despite this, 'Organization of the Petroleum Exporting Countries' (OPEC) remains adamant on not cutting back its oil production. Currently, OPEC is pumping close to 31.77 million barrels per day (bpd) which is more than its target of 30 million bpd.

The OPEC is doing this to retain its market share. OPEC members had lost some portion of its market share to US shale producers, owing to robust production by the latter over the preceding two years.

In order to regain market share, OPEC members started drilling oil at record high levels. The excess supply situation resulted in oil prices heading downwards. The low prices of crude oil made it unfeasible for US shale producers to drill oil as their cost of production was higher as compared to the prices of crude oil. This is evident in the latest figures wherein there is a 65% decline in the oil rig count in the US. Now that US shale production has reduced considerably, will it solve the problems of OPEC and drive the crude oil prices northwards?

If the OPEC decides to curtail production, the prices will move upwards and this may spurt production from US shale producers. This could happen at the cost of the OPEC losing market share.

On the other side, if they do not curtail the production, they risk facing huge fiscal deficits on their balance sheet. Venezuela has been hit the hardest by the downturn in oil prices. However as reported, finances of Saudi Arabia, Kuwait and Qatar are stronger at this point. And so they might be able to withstand lower revenues for probably a year more. Provided a similar situation appears a year later, there is likely to be rising demands within the OPEC to reduce the production of oil.

To add to the woes, once the sanctions on Iran are lifted, Iran will start exporting oil. The easing of sanctions on Iran's oil industry would put further pressure on the market which is already oversupplied by 2m barrels per day.

Further, there are concerns regarding economic health of China, one of the world's top energy consumers. China is already slowing down and a combination of falling demand and rising supply has taken its toll on overall oil prices.

As per US Energy Information Administration, Brent crude should average $40 a barrel in 2016 and $50 a barrel in 2017. The report further states that it is quite likely that oil prices will not go up until late 2017.

At the end of the day, oil prices are highly volatile. While the last year has seen a dramatic drop in crude prices, history proves they can rise just as steeply. Since many variables influence global crude prices, we believe in taking a longer term call on oil prices.

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