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Wednesday, January 13, 2016

Crude Oil - Below $30 a Barrel

I just posted about how the nightmare continues for the oil & gas industry in 2016 as the oil price continues to fall but I didn't expect it to drop like this.

Looking at the dynamics, looking at the's just a free fall.

Oil price free fall

Oil dropped below $30 a barrel in New York for the first time in 12 years on concern that turmoil in China’s markets will curb fuel demand.

West Texas Intermediate crude tumbled to the lowest since December 2003. Concerns that China’s economic growth may slow has soured investors on the prospects for a quick recovery, turning hedge funds the least bullish in five years. A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20 a barrel, Morgan Stanley said.


Between 2010 and 2014, oil demand was soaring around the world, as countries recovered from the financial crisis but the supply was never able to keep up. 

Many older oil fields were stagnating. Conflicts in places like Libya and Iraq were restricting supply. Countries had to draw down their stockpiles, and prices soared to around $100 per barrel.

Those high prices were attractive for suppliers and spurred more drillers in the United States to use innovative hydraulic fracturing and horizontal drilling techniques to unlock vast quantities of oil from shale formations in places like North Dakota and Texas. The impact, US crude oil production has nearly doubled since 2010.

Of course, eventually, supply caught up with demand and then surpassed it, and it's really no rocket science....the crash came eventually. 

Things became worse when demand slowed down in the mid 2014. 

Europe had its mess and most importantly, China's economy was starting to slow down. 
The demand slowed down but the supply continues....United States was still producing more and more oil. Iraq and Libya were also starting to bring back more production. So prices began sliding.

In an attempt for Saudi to maintain market share, they too (together with OPEC) decided to increase production in order to maintain market share, hoping that the subsequent fall in oil prices would crush US frackers, who require higher prices to stay profitable.

US drillers turned out to be far more adaptable to low oil prices than the Saudis thought — companies cut costs and boosted productivity in order to keep the oil flowing. US production has stopped growing lately, but the decline has been far less severe than originally predicted. Iraq has nearly doubled production since 2014 as it recovers from conflict. Thanks to the nuclear deal with the US, Iran is expected to start exporting more oil soon, further adding to the supply glut.

The demand slide continues as China's slowdown continues...and here is the dynamics, and it's not good. As long as supply far surpassed the demand, it's difficult to see any comeback in oil prices. 


That is really the question isn't it? Some banks project oil prices to keep plummeting down to $20 per barrel this year. Others expect a rebound to around $40 or $50 per barrel as the US shale boom tapers off and demand recovers.

But ultimately, the supply and demand dynamic is the thing for us to keep an eye on. 

If say, a cold war between Saudi Arabia and Iran heat up and caused disruption in the production, the oil price may start to rebound. If China's economy suddenly rebounds unexpectedly, that could have a similar effect. Or maybe Iran will do something that causes European Union and US oil sanctions to snap back into place. Alternatively, maybe low oil prices will persist indefinitely.

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