Daily Management Review

Supply Expectations Pulled Down Crude Oil Prices


Oil prices plunge based on the expectations that US crude oil inventories are likely to hit a new record high.

Supply Expectations Pulled Down Crude Oil Prices
Global oil & gas sector’s renaissance driven by US shale revolution has been facing major challenges due to drastic slide in crude oil prices. With US oil industry drilling at four decade record highs, the continued oil production can lead to another oil price collapse. The Brent crude declined below one month low at $56 a barrel on 11th March 2015. OPEC cartel Secretary General Abdalla Salem el-Badri stated in a conference that the cartel’s policy of not cutting oil production has affected the US shale oil industry and resulted in a worldwide decline in capital expenditures, which can eventually lead to oil shortages and increased prices. He also pointed that the cartel will continue its price war strategy and will decide about production quotas in June 2015. However, US crude oil production did not slowdown despite OPEC’s tremendous efforts to curb drilling. Since November 2014, the US has been producing more than 9 million barrels a day and in first week of March 2015, the oil production reached the multi-decade high of about 9.32 million barrels a day.

From the year 2010 till mid-2014, oil prices were fairly stable at around $100 per barrel, due to rising oil consumption in countries like China and geopolitical concerns over countries like Iraq. After reaching the peak of $115 a barrel in June 2014, oil prices started sliding and dipped below $50 a barrel in the start of 2015 for the first time in past 6 years.

OPEC’s decision on November 2014 to keep its production ceiling unchanged at 30 million bpd, sent the crude oil prices into tailspin. This strategy was aimed to curb the US shale oil production growth along with other high cost productions from Canada. The decision was triggered by the fact that the US oil production led by shale boom was significantly increasing which in turn created a negative impact on OPEC’s export to the US. OPEC, a 12 member organization that pumps nearly 40% of world’s oil has been following its traditional policy of adjusting supply in order to support prices. With the aim to retain its market share against rival suppliers, OPEC shocked the global crude oil market by refusing to cut the output. The low oil prices will force the US shale producers to cut back their output which in turn will facilitate rebalancing the mismatch between demand and supply.

However, the substantial drop in oil prices have created a profound impact across the globe thereby raising fear that small companies can go out of business. Major E&P companies are experiencing significant reduction in upstream capital programs for the year 2015 which in turn pulled out around 30% of rigs in the US which were actively drilling during 4Q14. This could lead to slowdown in the US oil production growth towards the second half of the year.

With rising debts levels in the balance sheets of oil companies, energy stocks are struggling. This signals that the energy sector is facing a tough time. The main factors for lowering 2015 growth projections are low price expectations, reduction in active rig counts in North America, cutback in 2015 capital spending plans by international oil companies, declining drilling permits in the US.