Today Oil is US$32/Barrel, Next Big Drop: March 2016

Oil Prices Dropping

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On Thursday 7 January, the price of Brent crude oil slumped to a 12-year low of US$32 a barrel. This was due to two factors:

 

[1] A slowdown in the Chinese economy, where trading had to be halted as their mainland stock markets tumbled by 7% in the world’s second biggest economy.

[2] USA Oil output continues to rise, in the world’s biggest economy.

 

China is the world’s second-largest user of oil and has driven most of the past growth in demand. Therefore China is a crucial buyer in the hugely oversupplied oil market, any drop in their demand can immediately cause a glut in the market and drive the price of oil downwards.

 

Oil prices have dropped more than 65% since their peak 18 months ago due to a global supply glut brought about by weak demand and record inventory levels.

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OPEC, led by Saudi Arabia, is engaged in a price war with higher cost producers, including the U.S., as it tries to protect its share of the market.

 

Prof Paul Stevens, an expert in petroleum economics at Chatham House, the foreign policy thinktank, said the value of oil may need to fall to US$20 before some producers cut back and reduce supply. “Storage is pretty much full and people are already talking about buying tankers as floating storage,” he told the BBC. “But if supply continues to outstrip demand, then the only one thing you can do with the oil is sell it.” (At reduced prices, unfortunately for us in T&T.)

 

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In Singapore, Oil traders are expecting another downward turn in the price of oil by March 2016. Two different factors will cause the price drop in this instance:

 

[1] An unusually warm winter as a result of an El Niño weather pattern

[2] Iran’s resurgent crude exports to hit global markets after sanctions are ended

 

Mild winter conditions will weaken the demand for heating in the U.S. and Europe. this could push down the oil price to cash cost, which is estimated to be US$20 per barrel.

 

The market may also have to accommodate a rapid rise in Iranian oil exports if sanctions are lifted, which many analysts say could happen in the first half of 2016.

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One option to deal with the glut would be to use crude oil tankers for storage. But this requires a price curve in which oil is sufficiently more expensive in the future than for immediate delivery – a market structure known as contango – so that holding costs can be covered. High tanker rates and a relatively flat price curve make floating storage unattractive for now, however, so analysts say spot prices would have to drop further to make storing crude on ships a viable market strategy.

 

In conclusion, it appears that our government may be without a clue as to what to do, apart from taking more downtime. They need some really fast innovative thinkers, and not the same old dinosaurs that they used in the past.Raising taxes here will only kill off already struggling businesses and create more unemployment. And of course, there is the creeping giant of Foreign Exchange demand.

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Posted by: Trini 2D Bone on