Crude Economics
Producers Suffer as the Oil Gushes

Brent crude, the global oil benchmark, is trading just above $47 per barrel. America’s benchmark, West Texas Intermediate (WTI), is just a few quarters away from dipping below $40 per barrel. That’s an astonishing drop from last summer’s $100+ per barrel levels, and as the Energy Information Administration (EIA) reports, those prices aren’t expected to significantly rebound anytime soon:

EIA has lowered crude oil price forecasts in the Short-Term Energy Outlook (STEO), expecting West Texas Intermediate (WTI) crude oil prices to average $49 per barrel (b) in 2015 and $54/b in 2016, $6/b and $8/b lower than forecast in last month’s STEO, respectively. Concerns over the pace of economic growth in emerging markets, continuing (albeit slowing) supply growth, increases in global liquids inventories, and the possibility of increasing volumes of Iranian crude oil entering the market contributed to the changed forecast.

In other words, oil producers need to get used to these prices, because they appear to be the new reality for crude markets. The world is positively swimming in crude right now as OPEC hits record output numbers while American shale firms, the market’s newcomers, continue to surprise with their ability to keep the crude flowing even as their margins shrink.

A prolonged period of cheap oil prices will further incentivize fracking companies to streamline processes and innovate new ways to boost output with less investment, though it will also cull the lesser-performing plays and put a dent into what had been a period of unchecked growth for U.S. oil production. But the picture for OPEC’s members and the rest of the world’s petrostates is a lot grimmer, as these regimes will have to find new ways to balance their budgets (or finance their debts) as the bearish market pushes them further into the red.

Consumers can expect relief at the pump, though the EIA notes that strong demand and refinery outages have led to an increase in the average U.S. gas price this summer. Analysts expect gas prices to drop again this fall, and, when they do, American drivers will be experiencing one of the many effects of the remarkable collapse in the price of oil this past year.

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