Oil prices may have mounted a strong comeback after hitting a 10-plus-year low under $30 per barrel in February, but the recovery looks like it’s in jeopardy as demand falls on weak economic data, drillers ramp up activity, and outages in key oil-producing areas wind down. This has many calling for crude prices to fall from the current $45 per barrel to at least $36 per barrel.
3 Factors Pointing to Lower Oil Prices
Oil prices are up roughly 65% from a decade low of $27 per barrel in February after a number of production outages (including the forest fire in Fort McMurray, Alberta) ate into the global supply.
But the recovery and broader bullish sentiment for oil prices has stalled. In fact, there is a good chance oil prices could spiral from the current $45 per barrel to $36 per barrel and possibly dip below $30. The following factors could continue to put serious pressure on global oil prices.
- Brexit Vote and Weakness in the Eurozone: Oil prices stalled after the June 23 Brexit vote undermined financial markets. Investors are worried about how the Brexit vote will impact the U.K. economy. Many believe the Bank of England will need to cut down its already record-low lending rate of 0.5%. One estimate suggests the Brexit vote will sap 100,000 barrels of oil per day off global demand in 2017.1
- Oil Output Increasing: Despite weak economic indicators from Asia, the eurozone, Canada, Russia, and the United States, oil producers continue to generate record levels of oil. Hundreds of thousands of barrels of oil are beginning to trickle in from Alberta after forest fires crippled output two months ago. Iran is expecting to raise its exports to four million barrels a day. The record-breaking oil supply and record-breaking inventories will see additional fuel as Nigeria and Libya ramp up production. On top of that, the U.S. rig count has been on the rise for the past month. These extra rigs could flood the market with an additional 250,000 barrels of oil per day.2
- Saudi Arabia Embraces Low Oil Prices: Saudi Arabia is no hurry to see oil prices climb higher. In fact, Saudi Arabia’s energy minister said the oil market was stabilizing and becoming more balanced. This means the world’s biggest oil exporter has no intentions of cutting oil production in an effort to raise global oil prices.3
Going forward, unless there is a serious cut in oil production or there is an unexpected global demand for oil, oil prices will continue to face pressure and trend downwards. The big question is, how low will oil prices go?
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- “Investors More Bearish on Oil Price Recovery,” The Wall Street Journal web site, July 11, 2016; https://www.wsj.com/articles/investors-more-bearish-on-oil-price-recovery-1468241443.
- “Oil ends at two-month low as OPEC output nears 8-year high,” MarketWatch web site, July 11, 2016; https://www.marketwatch.com/story/oil-prices-fall-on-concerns-global-glut-set-to-worsen-2016-07-11.
- “Saudi energy minister says oil market is balancing,” Reuters web site, July 10, 2016; https://www.reuters.com/article/us-saudi-enery-al-falih-idUSKCN0ZQ0EY.
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