Spend Matters welcomes this guest article by Avneet K. Deol of Mintec.
For months now, crude oil has been making headlines as the price fell from $107 a barrel in June 2014 to a staggering $44 a barrel at the end of January 2015, a fall of nearly 60%. Prices have rallied since then, rising by 38% to reach $60 a barrel in the last week of May. So what was the cause and effect of this sudden drop?
Crude oil is a crucial feedstock to a wide range of products, although the greatest demand is for fuels including plastics, chemicals, medicines and refined gases. The price of crude oil then has a huge impact on many day-to-day products. The reduction in production costs and fall in demand for biofuels has affected many commodity prices, from metals to grains, to plastics to shipping.
More interestingly, low crude oil prices have also impacted US economic growth. In figures recently released, the growth rate of the US economy slowed to an annualized rate of 0.2% for Q1 2015, compared with 2.2% in Q4 2014. This has been driven by lower consumer spending and also a nearly 50% fall in investments for mining, exploration, shafts and oil wells.
Supply and demand is the vital driver for the crude oil market, and large supplies were the instigator for the fall in price. Global production in 2014 is estimated at 93.10m bbl/d, up 2% year-over-year. This is due to rising production in the non- Organization of Petroleum Exporting Countries (OPEC), driven by increased production in the US - the world’s largest producer in 2014. The price fall was exacerbated by a controversial decision in November 2014 by OPEC not to lower production, in a bid to maintain market share. In 2015 global production is expected to continue to increase 2% y-o-y to 94.59m bbl/d. On the demand side, global consumption of crude oil in 2015 is also forecast to increase, but at a slower rate, up 1% y-o-y to 93.28m bbl/d.
The oil industry has had to make some changes as a result of reduced margins and there are signs that the US has now lowered production. The US oil rig count, a measure of the rigs engaged in exploration and production, has fallen for 22 consecutive weeks to reach 668, over half of the number in the same period in 2014. US stockpiles also fell by 2.2m barrels for the same week; the second consecutive decline.
This recent news and figures showing that crude oil inventories increased by just 1.3m barrels week-on-week for the week ending 10th April, the smallest growth since the start of the year, have led to an increase in prices. Oil prices have also been affected by the dollar weakening against major currencies in April.
While signs of tight supplies in the US have created this bullish sentiment in the market, there remains speculation as to whether prices will continue increasing. There are visibly more long term contracts been taken out by speculators, this is also helping to drive the price of oil up. Talks over Iran’s nuclear programme are currently taking place and are due to be finalized by June 30. The potential agreement could result in the lifting of oil sanctions against Iran and an increase in their crude oil production and exports.