Oil price: At a bargain for a long time
Christmas is just twelve days away. With known chains of mall operators opening new sites in Metro Cebu and offering items at a bargain, most of us are certainly on a buying spree and are taking these opportunities as the best gift this Christmas. However, if prices should be used as barometers for this Christmas to be merry, probably, another price cut surpasses them all-the free fall of oil prices in the world market.
Truth to tell, probably, the best Christmas gift we shall have is the free fall oil prices. Actually, we enjoyed it throughout the year 2015 and will enjoy it more in the ensuing year. To recall, as we welcome year 2015, the prices went down below US$50 per barrel, at US$47.93, last January 6, 2015. Considering that in the first seven months of 2014, prices were hovering around US$100 per barrel, it provided a five-month respite (when prices were relatively low in the last five months of 2014) and enabled businessmen, employees and individuals to save for their Christmas celebrations in 2014. Today, crude prices of both West Texas Intermediate (WTI) and Brent are below US$40.00 per barrel. WTI is priced at US$36.76 while Brent front month is at US$37.93.
Historically though, this pricing scenario has been repeated several times. For instance, in July 3, 2008, oil prices almost breached US$150.00 per barrel. With such seemingly irreversible trend, oil prices reaching the US$200.00 per barrel was then viewed as unquestionable. The question was - when? Contrary, however, to most expectations, oil prices dropped sharply and were hovering around US$40.00 per barrel (West Texas Intermediate crude was at its lowest at US$30.81 per barrel in December 22, 2008) by the end of 2008. This decline was due primarily to the USA’s economic situation. Then, the USA was in dire economic crunch and the consequences of such turmoil traversed all over the globe. Accordingly, the demand for oil substantially decreased, thus, the price decline.
The decline in prices in the second half of 2014 until 2015, however, was far different. This time, the USA’s economy is on the rise and the demand for oil is steadily increasing. Why then? It is because the USA, the world’s largest consumer, has increased its own oil production and, thus, has become less dependent on imports. This fact was confirmed by the U.S. Energy Information Agency. The agency reported that, “in 2013 the U.S. imported approximately 33% of the petroleum consumed, the lowest since 1985. It also means, “net crude oil imports are down over 25% in the last five years while the country is still more than 20% below its peak production of 1970”. Moreover, they are now less dependent on oil imports from the Middle East. They are now importing most of their requirements from Canada.
Moreover, in the second half of the year 2009 and the entire year of 2010, we saw oil prices swinging between US$60.00 and US$90.00 per barrel. Without much changes in the political and economic arena in 2009 when compared to 2008, people were wondering why oil prices went up to such level. Why? The fact is, oil producing countries have different preferential prices. Deutsche Bank, for one, in 2008, calculated how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries who are often the first to call for production cuts, need the highest price per barrel of US$95. Russia needs about US$70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about US$55 a barrel.
So that, to achieve their desired prices, OPEC, being the world’s biggest cartel and where Saudi Arabia, Venezuela and Iran are members, opted for production cuts, as usual, and moved prices slowly but surely around US$90.00 per barrel in 2011. Then, in 2012, with the political turmoil prevailing in most oil producing countries in the Middle East, production was severely affected and prices breached US$100.00 per barrel once again. Then, as the USA slowly recovered, we saw prices steadily hovering around US$100.00 per barrel in 2013 and most of the months in 2014.
The question now is, will the same scenario or price increases happen again in 2016? The answer is No. For one, OPEC has abandoned their usual approach in trying to push prices up-production cuts. The reason is too simple. If they cut production and won’t be serving their regular customers’ requirements, chances are, they will lose them to non-OPEC member countries like Russia, one of the world’s largest oil producers. Moreover, resurfacing after years of economic sanctions, Iraq and Iran will continue to produce to the max for them to also recover.
Warily, no less than the International Energy Agency (IEA) cautioned that “global oversupply of crude could worsen next year”. Likewise, Goldman Sachs, one of the world’s largest and influential investment banks, has said “oil could fall to US$20 per barrel if the world runs out of capacity to store unwanted supply”.
While this might be an unwelcome development for oil exporting countries, this could be the best year-round Christmas gift for oil-importing countries like us.
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