The oil price has been plunging this year, but what is causing it, and should investors worry? This month we analyze how the value of crude is likely to remain low.
“Silence is the ultimate weapon of power” Charles de Gaulle once said. This insight is clearly understood by Ali al Naimi, the powerful Saudi oil minister, who has been mostly silent and was on vacation last month when the whole oil market was waiting for him. One of the burning questions in the oil markets right now is whether Saudi Arabia and OPEC will balance the oil market after the steep drop in Brent prices since last June. Brent prices have tumbled 21.6% in the year to date.
A perfect storm has been brewing for oil
The oil market has experienced a ‘perfect storm’ from supply and demand side developments in recent months. On the one hand, the oil market is currently experiencing a supply boom. We expected to lower production by OPEC suppliers to try to raise prices, but the strong production volumes generated by the continuing oil revolution in the US has surprised both us and the oil market. US oil output is now running at the fastest pace since measurement began in 1983. OPEC production also kept its upward trend last month with an additional 53,000 barrels per day amounting to a total production of 30.97 million barrels per day
At the same time the macro economic growth momentum of the global economy slowed down, leading to a less bright demand outlook for oil. The IEA cut its estimates for global oil demand growth by 250,000 barrels per day for 2014 and by 90,000 barrels per day for 2015. The question that is now prevalent is whether the oil market is going to rebalance next year and if so, in which way this rebalancing process is going to take shape.