How low can oil prices go? Before we figure out the answer to that question, let’s try to understand the reasons behind the recent slide.
And if you’re wondering why I’m writing about oil in this forex blog, then you should remember that this commodity’s price is positively correlated to the Canadian dollar. In other words, further declines in “black crack” prices could lead to more Loonie weakness. Aside from that, a prolonged slide in oil prices could revive global deflation concerns so y’all better read up to figure out if these factors could wreak more havoc.
1. Saudi Arabia’s oil price adjustments
Just when it seemed like crude oil has reached a bottom and was starting to recover earlier in the week, Saudi Arabia announced its decision to cut oil futures prices for December delivery to the United States. Bear in mind that Saudi Arabia is the world’s largest crude oil exporter so its move to reduce its selling prices to the U.S. pushed oil prices below $76 per barrel – its lowest level since October 2010.
Industry analysts say that this marks the start of oil price wars, as Saudi Arabia lowered oil export prices to the U.S. probably because it felt threatened by the country’s growing domestic oil production industry. After all, Saudi Arabia still raised oil export prices to Asia and Europe where demand remains strong.
2. Higher oil inventories in North America
One of the biggest reasons why Saudi Arabia is targeting the U.S. in these price wars is that the latter is ramping up its shale drilling and oil production operations. In fact, the shale boom in North Dakota and Texas has allowed the U.S. to go head-to-head with Saudi Arabia in being the number one oil producer in the world.
The latest report released by the American Petroleum Institute revealed that oil stockpiles in the U.S. have either stagnated or increased, spurring fears of an oversupply in the country. As we’ve all learned in Economics 101, the Law of Supply and Demand states that increasing supply with constant demand could put downward pressure on prices.
3. Russian oil sanctions
Yep, this seems like an age-old issue already, but Russia’s problems continue to contribute to weaker oil prices! Recall that the U.S. and Europe made a joint effort back in July to curb Russia’s oil production by restricting access to Western funding and technology that would allow the country to tap into Artic deep sea and shale oil reserves.
With that, Russia’s oil production companies were forced to make spending cuts and search for cheaper sources while managing to churn out 10.6 million barrels per day in October – still within its average pace and even close to record highs. Looks like the sanctions barely hurt supply and wound up putting additional downward pressure on oil prices!
4. No reduction in OPEC production?
All eyes and ears are now on the OPEC (Organization of Petroleum Exporting Countries), which is set to meet later this month. You see, this international oil cartel usually announces production adjustments in order to control oil supply and prices.
Commodity traders seem to be gearing up for another reduction in OPEC oil production, as the 12-member cartel might step in to boost oil prices. However, some OPEC nations such as Iran and Kuwait have mentioned that they are not looking to cut their own production.
On the other hand, other OPEC nations such as Libya and Venezuela have called for measures to reduce oil production. Analysts predict that OPEC would need to cut 1.5 billion barrels per day in order to bring crude oil prices up to the $80-90 per barrel levels.
Do you think we’ll see a recovery in oil prices soon? Share your thoughts in our comment box or cast your votes in our poll below!