Crude Economics
A New Oil Equilibrium

After staging a strong rally on renewed optimism that oil’s worst days were behind it, crude prices have receded back down to around $45 per barrel in recent days. As Reuters reports, near-record OPEC production in April put a quick stop to the rebound:

Oil prices fell about 3 percent on Monday as production from the Organization of the Petroleum Exporting Countries neared all-time peaks and record speculative buying in global benchmark Brent sparked profit-taking on last month’s outsized rally.

OPEC’s crude production climbed in April to 32.64 million barrels per day, close to the highest in recent history, a Reuters survey showed. Iraq’s April exports from southern fields increased, as did seaborne exports from Russia, the biggest exporter outside OPEC. […]

“The recent rally in oil prices that took WTI above $46 a barrel appears to have little to do with fundamentals, only partially with financial factors, and possibly more to do with sentiment,” BNP Paribas oil strategists Harry Tchilinguirian and Gareth Lewis-Davies said.

That “sentimental” rebound is ebbing in the face of harder truths—namely that demand for oil remains tepid while supplies are abundant. The resultant glut brought prices down into the $20 range from a June 2014 high of over $110 per barrel, and though the (failed) petrostate freeze plan was apparently enough to convince traders that the worst is over for the global crude market, the oversupply remains. It’s not surprising then that burgeoning OPEC supplies are setting an upper limit to how far oil prices can climb on changing market psychology.

But while $50 oil seems out of reach for the time being, there’s also reason to doubt prices will fall much further than current levels. American shale producers are struggling to cope with this prolonged bearish market, as the relatively high cost of fracking makes it especially difficult for these firms to profitably operate when oil is such a bargain. The shale industry carries a large amount of debt, and many companies have already filed for bankruptcy, with two more filing since last Friday alone. The lower the price of oil goes, the more firms will follow suit, and the ensuing loss of U.S. output should help stop further price slides.

Predicting the future of the oil market can be a fool’s errand—unpredictable vagaries of supply and demand can (and usually do) confound even the most sober analysts—but barring some extraordinary event(s), it looks like there are mechanisms in place to keep oil somewhere between $40 and $50 per barrel for the time being.

Features Icon
show comments
© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service