Oil prices have recently plummeted to a new 12-year low. How is this affecting the industry?
At just above $30 per barrel, Brent crude oil is now at its lowest price since 2003, and major banks have warned that the fall is likely to continue.
Standard Chartered has warned that the oil price could even dip to $10 per barrel. Slightly more optimistic was RBS, which estimated that the oil price could drop to about $16 per barrel, and Morgan Stanley was yet more positive (if that’s the right word), predicting that $20 per barrel is more likely.
Whichever estimate ends up being closest, the drop in both the Brent crude and West Texas Intermediate oil prices will compound the existing slump and have global economic repercussions. It seems much has changed since the pre-Christmas predictions of a
“modest rebound” in the price of this crucial commodity.
No equilibriumIn her report for
The Telegraph, Mehreen Khan describes the current oil market as “lopsided” and says analysts are blaming an unhelpful mix of oversupply and stagnant demand, which is weighing on traders.
Khan cites Standard Chartered’s rationale for its particularly low price estimate. It stated: “Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the dollar and equity markets.”
Khan goes on to remind us that the last time oil slumped to $10 per barrel was in 1998, when the Asian financial crisis was in full swing. She says that, according to Simon Williams at the RAC, a world in which the oil price is $10 would see petrol prices plummet to 86p per litre.
Khan quotes Williams as saying that, in order for this to happen, “the pound would have to get no weaker against the dollar than it is today”.
The Telegraph coverage
Chronic oversupply Global Post’s Allison Jackson tackles some of the key questions surrounding the oil price announcements.
She asks, “Why are prices falling?” and cites, among other factors, a “chronic oversupply” of oil and the refusal of certain member nations of the Organization of the Petroleum Exporting Countries – which account for about 40% of the world’s total oil – to cut their production.
Asking, “How low will they go?”, Jackson refers to the various estimates outlined by the major banks, but points out that these could change dramatically “if geopolitical tensions in the Middle East were to escalate or China's economy were to collapse further”.
Jackson ends by reminding readers why this all matters: “Plunging oil prices have fueled turmoil in global financial and commodity markets as investors fret about the strength of the world economy.
“Oil also has a big impact on inflation, which is a major factor in US and European central bank policy decisions. Furthermore, some countries, like Russia* and Mexico, are heavily reliant on oil revenues to finance their economies. Falling prices can destabilise entire national economies – and the nations themselves.”
Global Post opinion
Taking its tollHighlighting another effect of the price drop and the assumption that there’s worse to come,
Wealth Manager’s James Phillips reports that BP plans to cut 4,000 jobs on account of “toughening market conditions”.
And it’s not only BP taking drastic action in light of the revised price estimations. Phillips says: “Brazilian giant Petrobras, which has been mired in corruption scandals, said it would slash its capital investment programme over the next five years from a planned $130.3bn to $98.4bn.”
Phillips describes the situation as: “The unrelenting downward pressure on the crude price taking its toll on the oil majors.”
Wealth Manager report
* It was announced today that Russia will cut its Crude shipments by 6.4%, which will have dramatic consequences for its economy but will remove a third of the excess supply that is currently thwarting the oil markets.
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