Crude oil is probably the most volatile commodity in today’s market, as its price can either surge or decline depending on socio-economic factors that drive supply and demand. Periods of rapid economic growth by developing countries can raise oil price by driving up the demand. In order to meet the demand, oil producers increase their supply that eventually stabilizes the price. The Organization of the Petroleum Exporting Countries, or OPEC, accounts for nearly 45% of global oil production and holds 82% of the world’s “proven” oil reserves – playing a major hand in influencing global oil price through its supply. If the global demand is not met with supply, the price of oil skyrockets. Similarly, an excess of oil in the market drives the price down.
One of the biggest oil price drop in recent history occurred during 2014-15, as the cost of one barrel went from being $115 in June 2014 to $49 in January 2015, according to the international benchmark Brent Crude Oil Futures. The emerging economies in the world – including China, India, Russia, and Brazil – experienced a slowdown to their rapid growth and expansion that occurred since the turn of the century. The much slower growth of such highly populated countries drove oil demand down, slashing its price in the market. At the same time, the United States and Canada also began extracting oil from their own reserves. This cut their oil imports sharply and further reduced the demand of OPEC produced oil in the world.
After hitting a low of $30 per barrel in early 2016, crude oil price kept increasing and managed to hit a four year high ($86 per barrel) in early October 2018. Since then, it has witnessed a 25% drop in the market. The U.S. oil benchmark, West Texas Intermediate, marked a historic 12th day of straight decline and descended deep down into a bear market with a 28% drop since its October peak. The sudden decrease in oil prices occurred after OPEC released a revised monthly forecast that revealed a further reduction in global oil demand in 2019. The new report estimates that demand would grow by 1.3 million barrels/day in 2019, about 70,000 barrels/day lower than last month’s forecast. The forecast report arrived after OPEC raised its oil production in September 2018 by 100,000 barrels/day to reach 32.78 million barrels of oil per day – a one year high.
As investors and OPEC become aware that an impending oversupply of oil is on the horizon, it’s no wonder that oil prices entered a bear market in the United States. After Saudi Arabia’s Energy Minister Khalid al-Falih divulged that OPEC had decided to cut oil production next year, the U.S. President Trump tweeted that hopefully, it would not materialize, as oil prices should be much lower based on supply. An advocate for lower oil price, Trump recently granted waivers to eight countries – including India, Japan, South Korea – that allowed them to purchase oil from another OPEC country, Iran. His gesture, along with an increase in U.S. oil production to a record 11.6 barrels/day has added to oversupply worries and reduced the price.
The mercurial price of oil has garnered it as one of the most watched trends in economics during the 21st century. At present, a fear of oversupply amid lower demand – due to subdued global economic growth – has resulted in the price of oil to drop. The subsequent decision undertaken by OPEC will determine if it continues to drop or stabilizes at the present cost.