Lowest oil price in 12 years?

The oil price has fallen to a 12 year low to $32.62. Brent crude, which is the most expensive of the crudes has sank by 4.2% and is now trading at $ 34.88 a barrel. This is the lowest it has been since July 2004.

US crude is also affected and is trading at $33.42, 3.9% below its lowest level in 2008.

The tumbling oil prices are as a result of oversupply of oil. The prices are now 70% lower than 18 months ago, which has heavily affected companies and government reliant on oil revenues.

The trend is expected to continue this year and crude prices of $30 might be in sight, warns Mr. Batstone-Carr.

The depreciation of China’s Yuan on 7^th January 2016 has also negatively affected the economy as it sent stock markets tumbling.  China’s stock market was suspended following the depreciation.

The 17,000 barrels a day gain in US crude production, has increased the oil production to 9.22 million barrels a day.  With the US supply increasing, and Iran’s production having resumed, oil is now oversupplied globally such that there is trouble with storage. According to University of Dundee, Professor Emeritus, Paul Stevens , the US is considered to have amongst one of the world’s largest storage facilities has  no more space left to keep it.

The challenge now lies in trying to reduce supply such as to push the oil price up. However, even if the US production is to be reduced this year due to oil companies halting production, this could take up to several months in order to get rid of the excess supply.  Also given that Saudi Arabia is not willing to give up its market share, price increases might be observed after the next OPEC meeting in June.

The question now lies is it viable to continue producing below $35 a barrel?  Many large companies have been able to weather the storm however, major job losses and scale backs have been made on exploration activities. Thousands of job losses have been reported in the North Sea, since late 2014, due to the tumbling prices of the Brent crude. Many companies have cut back on costs in order to survive.

Paul Stevens, professor emeritus at the University of Dundee, and a Middle East specialist, thinks that the US could tolerate the current oil prices and even prices as little  as $25 per barrel. Although US Shale producers may make losses, he believes that production will not stop until prices are below $25 a barrel.  This may not be the case in the North Sea.

As the demand for oil continues weakening, especially in China (one of the world’s largest energy consumer) and emerging markets, there is little expectation that the prices shall go higher in the near future.

Source; BBC , oilpro