Crude oil prices showed some recovery in trading this week before falling again. The price of oil now is slightly higher than its recent low of $45.84 in late January 2015. Does that mean that crude prices are headed north again? Analysts’ estimates of where prices are headed from here vary wildly, from as low as $10 to as much as $200 per barrel. That makes it very difficult to predict where prices will go, but that is all the more reason to take a look at the various facts, factors and trends in the crude oil market.
Supply Spurt
With a lot of shale oil wells in the U.S. coming online in the last few years, total oil production worldwide has seen a major spurt. Technological advances in seismic studies and mapping also mean that there are fewer dry holes, meaning exploration is better focused which in turn lead to a boost for overall production. Iraq is a lot more stable now than it was, say, 10 years ago and is busy exporting oil again. Combined with the fact that Russia and Saudi Arabia, the biggest suppliers of crude to the world, have not slashed production even in face of tumbling prices, supply of oil is far exceeding demand.
Decreased Demand
The developed countries are still afflicted to one extent or another by the economic malaise that was the after effect of the 2008 housing bubble collapse. Growth in developing countries is slowing too. China and India are both slowing down after showing double digit growth (or close to it) for the last few years. Brazil’s economy is at a standstill and the Russian Ruble is barely staying afloat. Hence, the demand for crude from both developed and developing countries is decreasing and the recent resurgence of the U.S. economy is not nearly enough to pick up the slack.
Technological Trends
New technology has made oil production cheaper, but that’s not the only way in which it affects oil prices. Renewable sources of energy are better harnessed now and alternatives to fossil fuels are fast gaining popularity. For instance, electric cars are becoming an increasingly common sight. Research in to more efficient and higher capacity batteries for these cars is well underway in both university and corporate laboratories. Such electricity powered cars could be a viable alternative for petrol or diesel powered cars in as little as 5 to 10 years.
Geopolitical Concerns
While all the above factors more or less point to stagnating or further falling of crude prices, the uncertainty of geopolitical equations renders any forecasting meaningless. Oil production in Libya has been thrown out of gear once again. Iraq is still very much on the brink of going the same way. If the political volatility in the Middle East were to blow up, and no one can tell if and when it will happen, oil production could drop from Saudi Arabia or Iran, two major producers. An escalation of violence in Ukraine could destabilise crude production in Russia.
Apart from the threat of violence, there are also simple political-economic factors. Russia, which relies very heavily on oil export, literally cannot afford to cut production. Saudi Arabia has refused to cut production despite the glut to not lose market share to cheaper North American producers, and also to perhaps send a message to its rivals that it doesn’t want to help them profit at the cost of its own market share.
Market Mechanics
Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial) sold its entire stake in Exxon Mobile Corp (XOM, Financial) sometime in late 2014. Berkshire Hathaway has also sold off its remaining stake in Houston-based ConocoPhillips (COP, Financial) and also cut its stake by 18% in National Oilwell Varco Inc. (NOV, Financial), another Houston-based oil and gas drilling equipment maker. For an investor who likes to typically hold his shares forever, this sort of withdrawal from the energy sector if a pretty significant move. It could mean that Mr Buffett does not see much value in the fossil fuel industry in the future. How that, or any of the factors discussed, will affect oil prices in the short to medium term, is pretty much impossible to predict with an assurance of accuracy.
