The Reasons Behind The Fall Of Crude Oil Prices

This is still one of the biggest stories in the world’s energy sector, the falling price of crude oil. The price has tumbled all the way down to under $46 per barrel, which was at its highest peak of around $115 per barrel in June 2014. The constant fall in prices has been the reason of much needed relief for some countries but has had disastrous effect on countries that produce oil like Venezuela and Russia.

The Reason for the Big Fall in Prices of Crude Oil

Let’s go a few years to really understand the root of this story. In the middle of the last decade, the demand of crude oil was globally at an all time high from economies such as China that needed the supply of the black gold for its expanding industries. The conflict in Iraq certainly did not help the matter. These supply and demand factors simply allowed the prices to rise above $100 per barrel.

As the prices continued to increase it was only logical for companies to look for cheaper and more profitable alternatives. This led them to investing heavily in oil extraction from places that were hard to drill as-well as funding more explorations. The US hit the bull’s eye when they discovered enormous reserves of shale formation that can be extracted by a process known as horizontal drilling and fracking. Canadian companies began to heat the gooey sands of Alberta with steam and thus permitting the extraction of crude oil that could be used for producing energy.

Even though the US was able to add, since 2008, roughly 4 million barrels per day into the global market it wasn’t enough to actually affect the global price of crude oil. This was because at about the same time there was geo-political unrest and conflict in the key oil producing regions of the middle-east. Libya was in a state of civil war and ISIS was threatening a war on Iraq. Iran was slapped with sanctions by the US and EU that restricted the export of their oil. All of this amounted to nothing less than 3 million barrels per day getting taken off the global oil market.

By the middle of 2014 the conflicts and outages were un-consequential. There was a rise in the production by the US and Canada this allowed for the supply to gradually and steadily grow globally. The supply was increasing but the demand was by now decreasing in Europe and Asia due to the slowdown in the economy of Germany and China. The US, which used to be the biggest consumer of oil in the world, has seen a decline in consumption because of more fuel efficient cars. At around the same time, Iran and Indonesia started to cut down on the subsidies they offered to users of fuel.

All these events culminated to the weak demand and rise in supply that ultimately curtailed the price to around the present $46 per barrel from its earlier peak of $115 per barrel in June.

Non Interference of OPEC

The oil cartel that is known as OPEC surprised many by not cutting back on the production of oil to allow for the prices to rise. Their meeting, in November 2014, was thought to bring a decision to slow down the production but contrary to the popular notion they did not do anything. Partly for the reason that Saudi Arabia simply refused to cut its production in order to hold its market share with the hope of throttling the boom of shale gas in the US with the low price in crude oil. Sadly to their surprise it sent the prices crashing down even further.

Ramifications of the Low Prices

The unprecedented slump in the global prices of crude oil has had an effect on every country around the globe. The lower than ever prices have certainly been a blessing on countries such as Japan and US that has oil prices at their lowest in years. But the tables have completely turned on oil producing states like Russia and Venezuela that were reliant on the sale of their precious black oil. Venezuela’s debt is almost headed for a default and Russia’s picture is not too different with a possible meltdown of its economy. Saudi Arabia is however prepared for such eventualities, but it will certainly have to fend off pressure if the prices continue to stay low.

How Long will this Situation Remain?

This is certainly very difficult to predict because it is purely a case of ‘Demand Vs Supply’. The potential break-out of conflicts in Iraq or Libya could again hamper the production in oil. If Asia and Europe’s economies see a comeback than certainly the demand will increase. Saudi Arabia could suddenly decide to cut down on the production. Any of these factors can attribute to the increase in the crude oil prices. Some of the Forex technical analysis experts have written to be being cautious, because if history has taught us anything it is that ‘anything is possible’.