Crude oil futures are dropping for the fifth day in a row, with the price of US benchmark West Texas Intermediate extending two-week lows. With oil markets stuck below $50 a barrel, it’s natural to feel bearish. However, there may be light at the end of the tunnel (or pipeline, as the case may be.)
The Oil Market Today
Global oil demand is nearly stagnant, especially with the economic slowdown in China. Kuwait’s OPEC representative recently said that they expect oversupply to last at least five more years. Despite the oil glut, OPEC continues to pursue its year-long policy of depressing prices to force high-cost competitors out of the market. OPEC leader Saudi Arabia is experiencing a budget deficit due to low prices in the oil market. However, their cost of extraction is in the low-$20 range. This points to them hanging on for a few more year of oversupply in the oil market, especially if they can increase production.
There’s signs that OPEC’s plan is finally working, though it’s taken longer than they expected (or would like.) The US Energy Information Agency is predicting that shale output will fall for an eighth straight month in December, and the drop in production is accelerating. Many fracking companies that got their initial round of financing when oil was $100 a barrel, are now unable to roll their debt over with oil prices at half that level. As a result, the active US oil rig count has been dropping. Last week saw 6 more rigs mothballed, making it the 10th week in a row that the rig count has dropped. There are only 572 active oil rigs in the United States, a five-year low.
The Oil Market In The Future
Present low prices in the oil market may be leading to reduced supply in the future. Investment in exploration and production expansion has fallen by $200 billion this year, meaning that nearly 5 million barrels a day in production has been canceled. Investment is set to fall even more next year. This will mark the first time since the oil crash of the mid-1980s that investment in future production has fallen two years in a row. The IEA notes that there needs to be $650 billion in capital expenditures, just to offset declining production in existing oilfields. This prognosis of future oil production dropping is leading a surge in speculation that oil prices will be heading up.
The International Energy Agency doesn’t share this enthusiasm, estimating that oil prices will take five years to reach $80 a barrel. BP doesn’t take as gloomy a view, expecting oil prices to hit $60 for the next three years, as slowly building demand whittles away at the oversupply.
One geopolitical concern is over OPEC’s growing power to dominate the oil market, as non-OPEC investment and production fall. The IEA predicts that OPEC will move from supplying 1/3 of global oil to 2/3, as its plan of flooding the market to drive out competitors bears fruit. This will allow OPEC to control prices to an extent not seen since the Oil Shock of the 1970s.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.