Are Oil Prices going to Rocket?

We’ve seen the effect of the recent collapse in oil prices at our garage forecourts — reduced petrol prices with the lowest forecourt price since November 2009. This was due to the reduced oil price, with a barrel of crude oil falling from $110 in June 2014 to a low of $45 in January 2015. Is this going to last? Let’s take a look behind the headlines and see if the price is going to rocket.

Oil Price to Rocket

The Financial Times reported that at a recent summit the former head of BP, Tony Hayward, stated that oil prices are set to increase — based on the short time it has taken OPEC (Organization of Petroleum Exporting Countries) to reign in the US shale boom. OPEC has traditionally decreased production to control falls in oil prices, but since June 2014 when the price started to fall, it has taken the decision to hold production steady leading to the low prices seen in 2015.

Due to the lower oil price, it has become uneconomic for some of oil production companies to keep producing and expanding — hence some fracking operations have been curtailed as fracking has relatively high production costs.

Although the dramatic fall in oil price seems to have an effect on oil production in the US — something OPEC denies was the reason for maintaining production volumes — some OPEC members have also been affected by the price drop.

Supply and Demand?

Every economics textbook will talk about supply and demand being the main driver behind prices: too much product in the supply chain and the price drops — increasing demand means prices go up. But is it really that simple?

The dramatic reduction in oil price since last summer cannot be explained purely by supply or demand issues — there was certainly not such a massive drop in demand to cause the oil price to plummet to $45 per barrel.

The oil price is decided by many different factors including: weather, government policies and global issues such as the economy and political situation. But perhaps the biggest price driver in oil — and many other commodities — is speculation by traders on the futures market. If the traders misjudge the situation, they can have a massive effect on the oil price — especially as they can be trading in oil volumes greater than the volume of oil stored in the United States at any one time.

The End of cheap Oil?

At the same conference some analysts expressed an opinion that it is too early to tell if it’s the end of cheap oil — although the price may have bottomed out. One factor against a rapid increase in oil prices is that there are thought to be very high storage volumes of oil, which could act as a buffer against rapidly increasing oil costs.

So will oil prices rocket? Who truly knows, but for more discussion about the price of oil have a look at this article: Will Oil Prices Recover?