Oil Prices Tumble below $50.00 Per Barrel
Crude oil prices recently fell below $50.00 per barrel for the first time since December 2016 as supplies hit record levels. The effects of lower oil prices are reverberating throughout the economy. Some maintain that low oil prices are good because it puts more money in consumers’ pockets while others say it damages the oil sector, which cancels out the benefits.
Oil prices have fallen more than eight percent in the week ended March 10, 2017 and are down more than nine percent in the first two weeks of the month to around $49.00 per barrel. Oil prices remain bearish and have fallen through the 50-day moving average of $53.07 and are approaching the 200-day moving average of $48.78.
Despite huge production cuts by OPEC and other big exporters, oil supplies are at record levels. U.S. crude supplies have increased for nine consecutive weeks, reaching a record 528.4 million barrels for the week ended March 3, 2017. This represents an 8.2-million-barrel increase from the week before.1
In November 2016, the cash-strapped Organization of Petroleum Exporting Countries (OPEC) and other (equally cash-strapped) non-OPEC oil-producing countries—including Russia, Mexico, and the Kingdom of Bahrain—joined forces to lower their production levels for 2017 in an effort to boost sagging oil prices. In the coming weeks, oil prices rebounded by 25%, climbing from around $43.00 per barrel to $54.00 per barrel.
But drilling in the U.S and stockpiles of crude have continued to climb, undermining any production cuts.
Has Saudi Arabia Been Defeated by U.S. Shale Producers?
Saudi Arabia has threatened U.S. oil producers that they should not assume OPEC will extend production cuts to offset rising production from U.S. shale.2 The thinking being that a resumption of full oil production by OPEC and its non-OPEC oil producing friends would glut the market even further and send oil prices plunging.
Keep in mind that this is the same Saudi Arabia that announced in November 2014, when oil was trading near $77.00 per barrel, that it would not cut production in the face of slumping oil prices. By February 2016, oil prices had spiraled to $30.00 per barrel.
It was widely believed that Saudi Arabia wanted to cobble the U.S. shale industry and maintaining its output would accomplish this. It backfired. Thanks to technological gains that significantly reduced production costs, the U.S. shale industry became more efficient.
Fast forward to March 2017, and the U.S. oil industry does not appear to be blinking. Oil prices may have fallen to around $49.00 per barrel, but the breakeven production level for shale oil is $30.00 per barrel. Moreover, the newly elected Trump administration has said it wants to remove regulations that hinder U.S. oil production. That would see a huge increase in domestic crude production, which would drive down oil prices even more.
Is Saudi Arabia bluffing? The oil-dependent country is producing less, losing revenue, and giving up market share to U.S. shale producers. Lower oil prices will also mean a much lower valuation for the initial public offering (IPO) of the state energy giant, Saudi Armaco, which is planned for 2018. It is widely expected to be the most valuable IPO ever, surpassing the $25.0 billion raised by Alibaba when it went public in 2014.
Will oil prices find support near $49.00 or fall even lower? If OPEC cuts production in the summer when demand for oil is high, will prices rebound? Low oil prices have already hurt shares in oil companies, and the S&P 500 is struggling. Could a further retreat in crude send nervous investors into precious metals?
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Uncertainty around low oil prices will impact more than just the oil and gas industries. Historically, low prices have been considered a bearish sign for stocks, but it’s possible that low oil prices could be a positive sign for stocks this time around as positive U.S. economic data continues to come in.
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- “Summary of Weekly Petroleum Data for the Week Ending March 3, 2017,” U.S. Energy Information Administration, March 9, 2017; http://ir.eia.gov/wpsr/wpsrsummary.pdf.
- “No Free Rides,” Say Saudi Officials to US Shale,” OilPrice.com, March 9, 2017; http://oilprice.com/Latest-Energy-News/World-News/No-Free-Rides-Say-Saudi-Officials-to-US-Shale.html.