Daily Management Review

New Mid Price Era Likely for Falling Crude Oil Prices


New Mid Price Era Likely for Falling Crude Oil Prices
Prospects of a new era of low prices in crude oil was triggered off after crude prices fell below the level that it had held for most of the past decade. The cost of crude per barrel reached below $50 raising fears of an era of super cheap oil.

The two crude oil price indicator benchmarks, North Sea Brent LCOc1 and U.S. West Texas Intermediate (WTI) CLc1 traded below the $50 mark before 2005. Before 2005 the Brent’s average price was just $18.37 a barrel in the 1990s, WTI $19.70 a barrel, and both only broke above $50 for the first time in late 2004.

Brent had traded over $140 a barrel in 2008, a price hike that was due to the explosive economic growth of China coupled with flatlining global output. Brent had maintained its $50 level for most of the time during the last decade.

While the slowing down of China’s growth at reduced rate seems steady and US shale drillers producing record amounts of oil, have resulted in reduced demand for crude. This is compounded by the increasing use of alternative energy sources for better efficiency and rising concerns about global warming.

Experts predict that the present trend in the price would continue as they are of the opinion that the cheap oil will not be able to spur demand as consumers look to save rather than spend. Therefore the cheap oil theory where low prices cancel itself out by increased demand due to lowered prices is not likely to happen.

The US and China factory data forced a partial tumble in the crude oil prices while a poll last week that showed OPEC output reached the highest monthly level in recent history in July, did the rest, analysts said.

Many oil analysts have already trim their oil price forecasts to take into account an increase in the supply of oil after last month’s agreement between Iran and the rest of the superpowers to lift sanctions gradually. This has opened up the possibility of the huge oil fields of Iran being used to pump in oil in the market thereby increasing supply amidst low demands.

Downward pressure on prices of crude oil would be maintained in the coming months due to a strong U.S. dollar, China's weakening economy and the prospect of rising Iranian oil exports, said a communiqué from BMI Research, a subsidiary of Fitch Ratings.

“Given the current ample market supply and intensifying bearish market sentiment toward prices a retest of Brent crude's 2015 low around $45 per barrel looks inevitable,” said the BMI Research communiqué.

Analysts expect that the oil prices is most likely to enter a mid-priced era of prices and the chances of a return to extremely high prices of $100 a barrel or more is unlikely any time soon expect in case of a sudden and significant reduction in production . Analysts have also ruled out an era of super-cheap oil as there is a tendency of consumers to save rather than spend.

A majority of brokerages and banks, taking part in a Reuters poll of oil price forecasts, were of the view that the Brent prices would average between $60 to $70 a barrel in 2016. Very few of the participants expected a very high or very low level of crude prices.

(Source: www.reuters.com)