After two years of declines, crude oil prices have been on the rebound, up around 30% since mid-February to around $50 per barrel. While the bulls are predicting oil prices will trend higher over the coming months, weak economic data and a world flooded with unwanted oil will put serious pressure on oil prices—and could send oil prices considerably lower throughout the coming months.
Oil Price Outlook Turns Bearish
Oil prices crashed from above $100 per barrel in July 2014 to under $30 per barrel this past February. Over the last two years, oil prices have tanked on weak economic indicators from Europe, China, Russia, and the U.S.
Crude oil prices faced additional pressure in November 2014 when the Organization of the Petroleum Exporting Countries (OPEC) announced it had no intention of cutting its output. This effectively flooded the global markets with crude oil no one wanted.
By February 2016, oil prices had fallen 70% to a more than 10-year low of around $27.50 per barrel. But then, seemingly out of nowhere, oil prices began to rebound in mid-February. Over the next four months, oil prices staged a comeback, rising close to 80% and hitting a one-year high of $51 per barrel.
Oil prices rebounded on slowing U.S. crude oil output, better-than-expected U.S. jobs data, and increased investor sentiment. But thanks to ongoing geopolitical issues and a raft of weak economic data, the bull market in oil prices will be short lived.
Five Reasons Why Oil Prices Will Fall in the Near Term
- There are growing worries that Britain will vote to leave the European Union. There is uncertainty about the vote, which takes place on June 23, with the “Leave” camp slightly ahead in most polls.
- Economic data coming out of the U.S., the world’s biggest economy, China, the second biggest economy, Japan, the third biggest economy, and the Eurozone, the world’s biggest economic region, remains fragile.
- The World Bank downgraded its forecast for global growth again this year to just 2.4% from its 2.9% prediction in January. The sluggish projections are a result of anemic growth in advanced economies, low commodity prices, and weak global trade.1
- In the midst of global economic malaise and dwindling demand for crude oil, OPEC and other oil-producing countries continue to pump out more oil. It’s basic supply-and-demand metrics. OPEC’s daily output is up 24,000 barrels per day (bpd) to 32.1 million. Iran, which has the fourth largest oil reserves in the world, had its oil sanctions lifted in January. The country is on track to produce 3.5 million bpd, putting it back to its pre-sanction levels.2
- Lastly, rising oil prices have encouraged some North American producers to reactivate a number of rigs. Despite the recent increase in oil prices, even OPEC has warned that there is “still a massive global supply overhang.”3
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- “Global Growth Forecast Again Revised Lower to 2.4%,” worldbank.org, June 7, 2016; https://www.worldbank.org/en/news/feature/2016/06/07/global-growth-forecast-again-revised-lower.
- “After Nuclear Deal, Iran Pulls Quick Oil Production Rebound,” npr.org, June 12, 2016; https://www.npr.org/2016/06/12/481750636/after-nuclear-deal-iran-pulls-quick-oil-production-rebound.
- “OPEC Forecasts Oil Glut to Fall in Second Half of 2016,” marketpulse.com, June 13, 2016; https://www.marketpulse.com/20160613/opec-forecasts-oil-glut-to-fall-in-second-half-of-2016/.
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