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Crude oil prices tanked on Monday after key producers failed to agree on a production cap that could have tightened supply. At the time of writing, crude oil was trading at US$ 40.23 per barrel.
Until a few years ago, US$ 100 per barrel was the new 'normal' for oil price. And then this capricious commodity proved everyone wrong.
Early this year, crude oil prices hit US$ 30 per barrel for the first time in 12 years. However, over the last couple of months, crude prices had shot up in anticipation of likely agreement on freezing production levels by oil producers.
To get out of the global supply glut in oil markets, major oil producers held talks on 17th April in Doha, Qatar over a plan to freeze output. As per the proposed freeze, crude oil producers were going to cap production at January levels up through October this year. However, the summit finished with no final accord.
It was noted that Saudi Arabia, the world's largest exporter of crude oil, refused to go along with the plan. The nation said that it would not limit its own output unless all OPEC (Organisation of the Petroleum Exporting Countries) nations, including Iran, do the same.
If one has to see things from Iran's point of view, there seems no scope for an output freeze. In fact, the country has stated that it is determined to crank up production now that its international sanctions are lifted.
Further, the matter gets worrisome as OPEC has predicted less than expected crude oil demand in 2016. OPEC recently said that world oil demand will grow by 1.20 million barrels per day (bpd) in 2016. This is 50,000 bpd less than expected previously. The estimates were lowered because of a slowdown in Latin America and China. OPEC further said that weakness in Brazil's economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks in oil demand this year.
According to the International Energy Agency's (IEA) latest report, the world produces about 96.4 million barrels of oil per day. This is as against the demand of 94.8 million barrels per day, as of the first quarter of 2016.
One shall note that crude oil prices have hit their lowest levels in more than a decade. And the root cause for this turmoil has been the global supply glut. Major oil producers have refused to cut their output levels, which means more supply than demand. For this reason, the prices of crude oil have tanked.
Is there more pain left for crude oil prices?
That can be a very tough call to make since oil is influenced by so many global factors. However, oil prices are economically unviable at such low levels for a long time.
Crude oil prices may be low right now, but historically crude oil prices have been very volatile. Prices could easily double or triple in a year's span. Don't assume that today's crude price and next year's crude price will be similar. Asad Dossani, editor of Daily Profit Hunter, recently wrote that OPEC has lost control of oil prices...and the resultant volatility is great for traders.
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