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February 17, 2016

Oil Price: How Low Will It Go?

Oil has begun its downward journey in July 2014 and since then the value of oil has roughly dropped from 98 USD per barrel to 29 USD. Today the price of this commodity is the lowest we have seen within the last decade. There are quite a few factors contributing towards such a rapid decline in the oil prices, let’s examine each of them separately.


Though, before we begin our analysis, it is important to note that the price of oil is controlled by OPEC, an organisation that can artificially set the supply of oil and its potential price on the market. OPEC is composed of 13 member countries, which are mostly the Gulf states.


What Influences the Price of Oil?


Major economic events are the key contributing factor towards the price change of this commodity. This is why traders usually avoid using technical indicators and rely on the fundamental analysis when forecasting the price. Let’s see what were the most crucial economic events related to oil price in the last few years.

Chinese Impact


Historically China has been the main net importer of oil, meaning that it is using much more oil than it is producing. A few years ago Chinese economy started to shrink, which was also observed by the falling stock market and there is actually nothing that tells us about a possible growth in this country anytime soon. Hence the demand for oil from China will only be dropping over the course of 2016.

ISIS Oil


There is no peace in the Middle East and even though it has been like this for years, with the appearance of a potential new Islamic State, the situation with the oil price became even more unpredictable. Currently there are large volumes of oil being pumped and sold every day below the market rates by ISIS and this contributes quite a lot towards the decline in the market price too. Even though there are military operations going on the territories, it does not seem like we will see the end of ISIS anytime soon. Hence, uncertainty in this region will only contribute towards a decline in the price of oil.

Market Share


Even though oil has a generally accepted price, it does not come with a similar cost of production. While it is possible for some countries to extract profits from the oil priced at 20 USD per barrel, other states may be already experience losses from the oil production at this rate. Currently the leaders of oil exports, like Saudi Arabia, are trying to do whatever it takes to sustain the market share and losing a share of the profits for such countries is not an issue.

Substitutions


Finally, it is clear that one of the main uses of oil is actually to power up the car engines globally. Today the automotive market is changing rapidly with more funds being invested in the electric cars and, hence, the future demand for oil seems to be smaller.

Conclusion


Even though the oil price is quite low now, there are no major bullish factors in 2016. Nevertheless, the development of the Chinese economy and the ISIS situation should become two of the determining factors of oil prices in the longer term.  

The Dolce Whey at Onnit.com!

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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