Between the rising U.S. dollar, the mounting supply glut in global crude reserves, and the potentially waning energy demand from the world’s largest consumer (China), oil prices have continued to get hammered lower this week.
Both WTI crude (the main gauge of crude prices in the United States) and Brent crude (the benchmark for Europe) sank below $50 per barrel this week, the first time both WTI and Brent have been this low since January. After falling another 0.83% and 1.43% this morning, respectively, WTI sat below $44.50/bbl while Brent hovered near $49/bbl. On the week, crude futures for next month’s delivery have dropped nearly 6%, which would be the worst weekly losses since March. Similarly, gasoline futures fell by 1.7%, sitting at their lowest levels in 6 months.
End of the Bull Run
The oil markets experienced an incredible bull run over the last decade, roughly beginning in 2004 and coming to a close as prices began to falter in the second half of 2014. Driven in no small part by the explosive growth of the Chinese economy and the attendant jump in energy demand from the People’s Republic, prices for a barrel of crude reached as high as $114 before embarking on a precipitous downturn. With the complete breakdown of the decade-long boom, it’s hard to make the case that crude prices are going to recover significantly in the medium-term.
More Factors Weighing on Oil
It’s not just the drop in demand or the strength of the dollar that are holding oil prices so low. (In general, crude prices exhibit an inverse relationship with the U.S. dollar, and find it difficult to rise when the dollar is gaining.) In addition, several developments in the Middle East—that traditional source of the world’s largest oil exports—are also playing a role.
One clear source of fresh supply flooding the crude oil market could be Iran. The Islamic Republic, for years struggling under economic sanctions that prevented its crude reserves from reaching the open market, has compiled a large stockpile of the gooey black stuff in offshore tankers, just waiting to be sold when sanctions are lifted as part of the recent nuclear deal. Estimates place the total inventory of idle crude at 30 million to 40 million barrels.
Iran, a member of OPEC, holds roughly 10% of global oil reserves, so it’s re-entry into the crude market will undoubtedly have some effect on supplies down the road, even as the country only gradually increases its exports and output once sanctions ease.
Saudi Long-Game—or Game of Chicken?
According to Forbes, Saudi Arabia’s plan to simply out-pump its competitors in order to maintain its share of the global oil market may not be as wise as once thought. U.S. shale producers, the main target of the strategy, have actually increased their number of active rigs of late as the shale industry becomes increasingly efficient. Moreover, as Iran becomes a major player in the market once again, Saudi oil producers will have to balance their own record levels of production with the increase in OPEC output as a whole, complicating the mad scramble for market share that resembles a game of Hungry Hungry Hippos. Much like resource miners, crude producers have simply been producing more of the commodity to compensate for depressed prices and cover their costs.
Will Saudi Arabia continue to pile on to the supply glut at current prices, or perhaps shift gears and cut production to help prices rebound?