As the oil price retreats aggressively from historic highs,
some are predicting a further fall for the commodity.
Oil reportedly fell around five per cent earlier this week, according to Reuters, after the International Monetary Fund cut its 2015 global
forecast in the face of lowered fuel demand and potential contango.
This latest movement has now seen OPEC member Iran predict a
continued downwards trend for oil to $25 a barrel unless OPEC action is
immediately taken.
Iranian oil minister Bijan Zanganeh said the country sees no
likelihood of OPEC action to stem the fall, with the potential for it bottom
out at the $25 per barrel mark.
But how did the market reach this apparent impasse
of lowering price coupled with inaction?
Head of oil research at Societe General SA, Mike Wittner,
told Bloomberg “the market is continuing to price in weak fundamentals in the
first half of this year,” adding that “there’s also been a return to risk
aversion because of Greece [and its potential exit for the Euro], something we
haven’t seen in a while”.
Much of this fall
has been driven by technological leaps and the ability to tap in to shale oil,
particularly in the US, which has seen this market grow 90 per cent since 2008
( with forecasts seeing it grow from .32 tcf of gas in 2000 to a
projected 9.69 tcf by 2020), and a global over-investment in oil
production.
Even in the face
of this slide OPEC decided to not cut production late last year,
further weakening prices as well as its power as a cartel as many of these
member nations see the price slide below their break-even watermarks.
For the first
time since its formation in 1960, two of the top three oil-producing countries
(the United States and Russia) are outside OPEC. While OPEC controls low-cost
oil, it has lost supply control at higher prices and cannot push prices up like
it could in the 1970s – or at least, not without stimulating a lot more supply
from elsewhere.
According to the
US Energy Information Agency, the United States now produces 11.1 million
barrels of oil per day – about the same as Saudi Arabia (11.7 million barrels)
and Russia (10.4 million barrels).
This new
situation is a free-for-all between the three major players: OPEC (led by Saudi
Arabia), US-based private oil companies, and Russian state-controlled oil
firms. All three groups have the same reason for wanting to produce more – they
need or want more money in the short-medium term to satisfy their current
spending, shareholder and salary expectations. Amid this competition, cutting
production on purpose isn’t such an attractive move.
Despite this gas production projects around
the world are on the increaseand this will
result in more falling prices, just as it has done for iron ore and coal.
These current economic conditions have driven fuel to six
year low, reaching a trough of $46.23 earlier this week.
Because we have record oil production now, the falling rig
numbers are not creating an immediate positive impact in bolstering
prices,” Phil Flynn, analyst at Price Futures Group in Chicago told
Reuters.
“In fact, they
may be creating just the opposite impact; reminding us how poor demand is.”
The current market is eerily similar to that found just before the Global Financial Crisis, where oil had spiked from $80 to $147 per barrel
and then plummeted to $35 per barrel within six months.
However in what may cheer the market, the price then swiftly
drove upwards towards $80 again, all within the space of 24 months.
How this will play out in the current market is yet to be
seen.