December 2014

Posted Dec 01, 2014

Despite the fact that both of the major geopolitical events, which affected oil pricing so much this past summer and fall, are still occurring, we are seeing a shift in the opposite direction. The major decline in oil prices is due to several factors. First, reduced speculatory fears of ISIS affecting Iraqi oil production and spreading into neighboring countries and second, more significantly, the fundamentals of supply and demand taking the wheel at long last, after many, many years of indifference. A very large part of this recipe occurred when the US pushed ahead in production this past July and became the largest producer of oil and natural gases in the world. That event has had a significant effect on pricing. Since the high of July crude West Texas Intermediate spot price has gone from $107 per barrel down to the current $54 per barrel [12/17/14] and Brent price also has fallen from over $100 per barrel to $59 per barrel [12/17/14]. While prices started dropping slowly, it wasn't abnormal for WTI to be in the mid $90s per barrel which it hovered at until the end of September before the drop picked up speed.

A second wind of the falling prices occurred on the Friday after Thanksgiving when OPEC, which many people in the market assumed would reduce production due to the falling prices, concluded their meeting by deciding that they would keep output at the current levels of a 30 million barrel per day target output.

The OPEC decision caused the market to drop almost 20%. Saudi Arabia has two goals in mind. First, Saudi Arabia and OPEC are thinking long term by attempting to edge out some of the smaller competition of American shale producers; smaller companies who can't handle the price per barrel due to their higher drilling costs. Even so, those companies in all likelihood will be absorbed by the larger US companies and production will continue at current levels, and additionally is actually expected to increase over half a million barrels. The Secondly, the reason for the reduction in price is to dole out financial punishment to Russia and Iran for supporting Bashar al-Assad during the Syria civil war. Since oil sales are a significant portion of those countries budgets, budgets that did not expect prices to go this low, they will now be forced to make cuts.