Oil Prices Continue to Slide in 2015 – Procurement Should be Ready

P2P in the oil and gas industry

Oil prices had a tough 2014, and the start of the New Year is turning out to be even worse. Oil prices have sunk lower than any other commodity. The US oil index fell below $50 a barrel this week, representing a more than 50% drop since June and a level not seen since April 2009.

Crude oil and petroleum products fell significantly during the last 4 months of the year, losing more than all other major commodities in the S&P Goldman Sachs Commodity Index (GSCI).

Increasing supply, and no plans of a slowdown by some major producers, is helping to drag oil prices down. North America continues to produce more oil supplies, and Saudi Arabia – the world’s largest producer of oil – does not plan to back down on production.

“The most important thing for the Saudis is market share,” Professor F. Gregory Gause, a Saudi expert at Texas A&M University, told Forbes recently. “They are not going to sacrifice it, they will play chicken with other producers, whether Iranian or American shale producers in order not to lose market share and the only way they will cut production is if they get an agreement with a broad array of OPEC and non-OPEC producers to take a fair amount of oil off the market.”

However, with the West Texas Intermediate price so low, US energy companies may decide to halt some production, other experts say. Data from Baker Hughes, for instance, shows a slowdown already happening. The number of rigs in operation last week in the US, for instance, hit a low not seen in 2 years.

Procurement organizations should be extremely vigilant in the first days and weeks of 2015 not just when it comes to oil related and energy contracts, but overall commodities (many of which, outside of certain agricultural contracts, have fallen in sympathy with oil – and may continue to fall). Examining de-escalation clauses is just the ante.

From a contracting perspective, companies should look not just to buy “down the market” given recent historic lows, but should stay open to shorter-term contracts until the market hits true bottom – and indeed it is still falling. It is only at this point that hedging and longer-term contracts make the most sense. For more information on these strategies, see our price forecasting philosophy and free metals commodity forecast trial (spanning industrial metals) here.

Outlook for Other Commodities

While prices of oil and natural gas sank in 2014, a few commodities experiences gains in prices. Among them were nickel, aluminum and zinc, the US Energy Information Administration reported. (Other industrial metals like lead and copper were not so lucky.)

Nickel prices had the largest increases in 2014, rising more than 10%. The Indonesian export ban on nickel helped boost the price of the metal. Zinc prices saw a 3-year high in July due to low inventory levels and a drop in aluminum production decreased supplies of the metal and boosted prices, according to the EIA.

Aluminum may not continue its streak, however. According to our sister site MetalMiner, China’s aluminum market is about to experience an oversupply during the first quarter of 2015. Nickel, though, may see another solid year, with MetalMiner predicting continued price increases. You can check out MetalMiner’s full 2015 commodities price outlook here.

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