Last week oil prices fell to a near 5-year low. But this week, they have slid even further, reaching 6-year lows. As of Monday, benchmark West Texas Intermediate was down 4% to $46.46 a barrel, and Brent crude hit $48.12.
West Texas crude prices have plummeted 57% since last June. Gasoline prices, too, are down considerably from last year. Regular grade gasoline now averages $2.13 a gallon. In January 2014, prices averaged $3.31.
Continued crude oil price declines have impacted analysts’ oil forecasts. Goldman Sachs slashed its 3-month forecasts for Brent crude to $42 a barrel (down from $80) and $41 a barrel (from $70) for US West Texas Intermediate. For the year, Goldman Sachs also now forecasts Brent at $50.40 a barrel (down from $83.75). It also cut its US crude outlook to $47.15 from $73.75.
A sharp increase in oil production is keeping oil prices low.
"There's a million barrels a day of excess production," Walter Zimmerman of United-ICAP told USA Today. "That is what is driving the price.
Keystone XL Questioned
The necessity of the Keystone XL pipeline has also come into question amid robust oil supplies and low gasoline prices. The Associated Press recently reported on the topic, asking whether it made sense for Canadian oil producers to have a pipeline built when many companies are expecting to have to scale back production. The article stated:
“If oil prices fall further or stay low for a long period, however, producers will have no choice but to delay or cancel new projects. If they do not think they would be able to fill the pipeline they would back out of the project because they have to pay for capacity on the line whether they use it or not.”
Procurement Take Note
Given the continued slide of oil prices, procurement organizations should revaluate their own commodity forecasting and commodity management strategies for 2015. In addition, organizations that have not formalized forecasting and hedging strategies should take advantage of the downturn in the market to evaluate their 6-, 12- and 18-month plans.
We encourage Spend Matters PRO advisory members and MetalMiner subscribers to reach out to us to discuss specific commodity management strategies in more detail.