Crude Oil or “Black Gold “, as it is fondly called for its significance to the economy, has seen a meltdown in prices since June 2014 .This price fall was steep and one sided breaking many price barriers. So what were the main factors that led to such a sharp slump in prices?
Over the surface we can divide this into two major factors:
U.S.A. Shale Gas
USA has always been a major net importer of Crude Oil. But with new developments in the Shale Gas sector, the increase shale gas production in the U.S has helped it move towards becoming a self reliant country. This boom has changed the balance of the market and tipped the pricing power against the OPEC countries.
The strength of dollar against other currencies plays a major role in prices of commodities. Appreciating dollar makes holding of commodities in other currencies costlier. Thus the latest positive data from the US has provided a boost to the appreciating dollar and directly affecting the price of commodities. With production disruptions around the world crude is trying to create its own path and becoming less sensitive against dollar.
While it is difficult to predict future prices but if we look closely than the two factors mentioned above have taken their effect and the market has incorporated these into the prices. Due to supply disruptions the market has recovered substantially from its lows and presently the supply demand dynamics is at equilibrium. But it remains to be seen how long it can sustain these increase in prices.
The appreciation of dollar, however, has been very sharp in last 18 months or so. An interest rate hike is likely in the coming months. Data coming out of the U.S. have provided mixed signals. This is why the hike has been put on hold. But it is imminent and would push the dollar further ahead. But U.S. being an export driven economy the appreciation of dollars in the long term could hurt business sentiments there.
One very important factor has been a steady rise in investments in the energy ETFs. With money coming in this sector it could translate into positive news for Crude bulls.
Major oil producing states has seen supply disruptions over a period of time. Iraq, Libya, and Nigeria have faced the ISIS and as a result production has declined. There have been attempts by OPEC and other non OPEC oil producing countries to curb production .With sanctions lifted, Iran is trying to ramp up production to pre sanction levels and has been a major oil producing country to resist attempts of production curbs. Canada wildfire has taken off a substantial production out of the market and changing the supply dynamics.
One major factor of note has been change of guard of oil minister in Saudi Arabia. Saudi Arabia wants to list shares of ARAMCO and divest 5% so that the Kingdom can create a fund in the low oil price era and protect itself from price shocks. If and when the divestment takes place it can have large scale ramifications on the oil sector as a whole.