One of the major factors that shook the global economy towards the second half of 2014 was the huge slump in crude oil prices. Brent crude oil, which was trading at close to $100 per barrel during June, saw a further slump over the months. It is currently trading at less than $50 per barrel. When questioned about the future of oil prices, different views are available from different experts. The following is the chart showing the slump in Brent crude oil prices for the last year.
While some say that that oil prices would never recover at all and that the $100per barrel mark would just be a dream from now on, some others believe that oil prices might recover slowly over a period of time. One section of experts, however, is quite optimistic about oil prices and believes that prices could shoot up in another 1 year or 18 months. Though there are so many opinions available, given the current market conditions, it does look like that oil price recovery might never happen in the future. These are the following reasons why chances of oil price recovery are looking bleak:
Supply vs Demand inconsistency
One of the main problems for the reduction in oil prices is the inconsistency between demand and supply. The OPEC countries have been continuously producing crude oil in bulk. However the demand is quite less for the same. The International Energy Agency, which evaluates the supply vs. demand, has predicted that if the current rate of supply continues, supply would overshoot demand by at least 1 million barrels per day within Q1 and by 1.5million barrels per day within Q2. However, this figure is valid only if OPEC produces 30 million barrels per day as per the expectations of the International Energy Agency.
In reality, it looks like supply will be far higher from the demand because OPEC countries are currently producing close to 4.8million barrels per day more than the expected value of 30m bpd. Experts are coming up with the frightening prediction that at the current rate of production, supply will be more than demand by 2 million bpd within Q2. Hence, one can only conclude that unless production is brought down drastically, oil prices recovery would not be possible.
Oil inventory on the rise
It looks like the supply and demand imbalance will not be set right at least until 2016. Crude oil inventories in America have been bulging up by 10million barrels a week. It is expected that the storage units will overshoot their capacity very soon at this rate. As per recent data, inventories of US petroleum and commercial crude oil had reached 60% and 75% respectively of their storage capacity. As production is expected to be on its peak at least till Q3, huge tankers are being bought by refiners to store excessive crude oil. They will then sell off this after Q3 or Q2, when demand slightly picks up, at a higher rate, thereby earning a profit for them.
External factors
There are also lots of market factors that are affecting the prices of crude oil prices. One of these is the low performance of China’s economy. As of 2013, China consumed most crude oil in the world was the second largest importer of liquid fuels. If consumption continues at this rate, China will be well on its way to consume a whopping 3 million barrels per day in 2020 and will contribute to 25% of the global demand. While China’s consumption is alright for the crude oil industry, the fact that its economy reported its lowest growth in the last 25 years is indeed a cause of concern. It is widely expected that a fall in economy of the largest consumer will definitely impact the crude oil prices to a great extent for 2015 as well.
Conclusion
From the above factors, it is evident that the recovery of oil prices is dependent on various factors. For per barrel price to touch the magic figure of $100 again, it requires a holistic change in the global economy, which looks highly challenging as of now. It is not impossible though for a turnaround of oil prices; however it will definitely take at least 2 to 3 years for achieving a balance between demand and supply which might then instigate rise in prices. Till such time the Oil Cos like British Petroleum (BP, Financial), Conoco Phillips (COP, Financial), Exxon Mobile (XOM), Linn Energy (LINE) and the likes will have to take the beating and the investors in the oil sector will have to patiently for longer period of time before they can square their positions in the sector.
