Low Oil Prices Continue

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Normally, winter would tend to drive up energy prices, as people use more energy in order to stay warm, but strangely enough the converse is happening. On December 21, the prices for Brent crude (a global benchmark) fell to an 11-year low of US$36.04 per barrel. This is even lower than the price dips that occurred in the financial crisis of 2008-2009, when demand plunged in tandem with the global economy.

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Consumers in the US have been reaping the benefits as gasoline prices fell as well since it is a downstream product, the average price dropping to below US$2 per gallon. During May and June of this year, prices inched up to just above US$60 per barrel. But since then the prices have softened again. The prices for both Brent and West Texas Intermediate crude are now expected to remain in the mid $30s. This of course will create a budget shortfall for Trinidad and Tobago since the estimated price was in the 40s.

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Goldman Sachs sees further weakness for oil due to the worsening of already weak fundamentals after OPEC held back from cutting production at its recent meeting. This investment bank is standing by its prediction of $20 a barrel bottom—the break-even cash cost for highly levered high-cost US shale producers. If oil prices fall below that level, companies will have to make output cuts in order to avert losses. Even though global oil stock will remain below storage capacity, Goldman said the rebalancing is “far from achieved” as U.S. rig count and exploration and production guidance are “too high” to achieve the required supply decline. OPEC is also likely to pump aggressively toward the high-end of Goldman’s 32-million-barrel a day forecast as Iran resumes productions after U.S. sanctions are lifted over the next few months.

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OPEC, Saudi Arabia in particular, declined to cut oil production back in late 2014 in order to maintain its market share, and has not changed its tune. Ever since then, oil markets have had to deal with an excess of supply, driving down prices.

 

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Posted by: Trini 2D Bone on