Why the price of oil just keeps tumbling? Oversupply? Conspiracy theory from Saudi? New suppliers?FT reports|
Oil prices are at new five year lows and analysts worry there are few hopeful signs suggesting a rebound.
Since their mid-June high, prices of Brent crude and West Texas Intermediate have fallen about 54 per cent each.
A supply glut coupled with soft demand are the main reasons for the decline. A lack of oil production cuts from Opec, the oil cartel which accounts for 40 per cent of global oil supply, has exacerbated the slide. Many analysts see these trends continuing.
First, new supply is entering a market already flush with oil. Exports from Russia and Iraq have picked up and new production is also expected to pick up at a number of fields in West Africa, Latin America, particularly Brazil.
Some analysts expect the arrival of several hundred thousand barrels a day of Canadian sour crude on the US Gulf Coast and a rise in exports from the Kurdistan Regional Government.
And in that vein, there is potential for supply from Iran. From Adam Longson at Morgan Stanley:
According to the AP, Iran and the US have tentatively agreed on a formula for Tehran to ship to Russia much of the disconcerting atomic material, which could open the door to a lifting of oil sanctions.
...If Iran were to see sanctions lifted, we believe exports could rise ~500 kilobarrels per day in a matter of months, with additional crude potentially coming out of storage.
Second, Saudi Arabia shows no signs of conceding and a cut seems unlikely ahead of the next Opec meeting scheduled for June. "The kingdom has stated that production will not be cut even if non-OPEC producers curtail production or oil falls to $20 per barrel," said Longson.
That Brent crude is in contango — a term which refers to prices for future delivery that exceed spot prices — and opportunities are opening up for storage carry trades is also worrisome, because it is indicative of an oversupplied market.
Evan Lucas at IG explains the logic behind the oversupply:
Major oil-exporting nations such as Russia, Iraq, Saudi Arabia and Kuwait are all jostling for a share of a stagnating oil market to offset the plummeting oil price.