What is the Cause of the Current Decline in Global Oil Price?

[vladtitov151 10]

I kinda got confuse when i saw an article today and someone argued that Oil decline is caused by financial traders. I have always thought that demand and supply re the determinant. please what do you think about this?

[dbelov275 11]

High oil prices gives boost for development of oil extraction technologies, making unconventional fields and areas (like offshore an shale oils) profitable. Many small companies started drilling and exploiting these alternative sources mainly from loans.

Advancements of automotive industries slowly reduce fuel requirements of car engines, reducing the increase of requirements of transportation sectors worldwide

Global warming warnings and their political backing increase capitalisation of renewable sources and reduce dependencies from fossil fuels

So new oil sources appeared on the market, meanwhile consumption reduces/stagnated. Biggest producers see the stagnating market and the the new sources, and they had 2 option. Defend the price by reducing oil production (and loosing market share for the new unconventional companies) or defend their market share and supress the new sources by floding the market with their cheaper oil.

 

They choose option 2: Saudi oil flooded market reducing prices greatly. Oil prices drop. Shale oil companies drilled from bank loans, needed payments so they cant stop production or going bankrupt. Other producers (like Russia and venezuela) needed the money comes from their oil production and dont want to reduce this source. The production-consumtion imbalance steadily reduced prices, until it hit the painful level, where even the cheap shale-producers cant sustain their production and stopped the drilling. There we are now. Cheap shale producers need 40–50 $/bbl for profitable production, more difficult fields require 60–80 $/bbl. Conventional fields produce at 10–30 $/bbl. Currently the exploration and exploitation of new fields stopped until prices goes up to make the works profitable again, but shrinking requirement push this date into the farther future

[vladtitov151 10]

You didn't mention demand and supply. are they not major determinant of the price of any stock or commodity? I have always thought they play major roles in the oil market. or don't they?

[dbelov275 11]

Of course they do. What i explained is simply how demand and supply is affected which in turns affect the price of oil. Demand and supply are the major determinant.

[dbelov275 11]

maybe you would understand better this way.

2 factors:

The global slowdown has reduced demand for oil. Most markedly: industry in China is just consuming a LOT less oil, other countries similar. Pick an economics textbook, turn to chapter 1, page 1, “How Supply and Demand Affects Pricing”: less demand means lower prices.

Oil producing countries are pumping as fast as they can. The Saudi Oil Minister is quoted as saying “The stone age didn’t end because they ran out of stones”. It is clear that mankind must leave huge quantities of easily accessible oil in the ground if we are to survive. So the Saudis are using their low cost of production to gain market share, it is better to get $20 a barrel now than nothing in a few years. Pick an economics textbook, turn to chapter 1, page 1, “How Supply and Demand Affects Pricing”: more supply means lower prices.

[vladtitov151 10]

Thanks buddy. I definitely understand now.