Will Oil Prices Rise?

The most fundamental determinant of oil prices is supply and demand.  When the demand for oil exceeds supply, oil prices tend to rise, or to remain high, on a relative basis.  When supply exceeds demand, however, oil prices tend to decline, or remain low, on a relative basis.

Of course, there are many other factors that influence the price of oil in addition to the balance of supply and demand.  These include currency fluctuations, sudden disruptions in major sources
of supply, political factors, bad weather such as hurricanes, disasters such as oil spills, etc.  All these factors can cause oil prices to spike, or to plummet on a temporary basis.  Usually, though, these effects are temporary and oil returns to the price dictated by the balance of supply and demand.

Oil prices fall beginning in August 2014

In July 2014, world oil demand exceeded supply by 0.18 million barrels per day.  Then in August 2014, oil supply exceeded demand by 0.86 million barrels per day.  Since that time, world oil supply has exceeded world oil demand, and oil prices have declined from $98 per barrel to the $30 barrel range.  And in March 2016, world oil supply exceeded world oil demand by 1.45 million barrels per day.

The crude oil production for the United States in January was 9.18 million barrels per day, putting it about 800,000 barrels per day behind Saudi Arabia in crude oil production, according to EIA data.

Most analysts attribute the increase in US oil production to the advent of shale oil technology.  Through the process of hydraulic fracturing, or “fracking,” it is possible to obtain oil from wells that were once thought to be “dry,” or non-productive.  This process has significantly increased the total crude oil out of the United States and other countries as well.  Fracking has become somewhat controversial, due to its environmental effects, which are still being studied.  Even so, the advent of the technology of fracking is one of the major reasons for the increase in oil supply, and for the imbalance of supply and demand.

The April 17 Meeting in Doha, Qatar

Early in March, there was discussion of a meeting of the major oil producers on March 20 in Russia, or sometime between March 20 and April 1.  This meeting would have been led by Russia and Saudi Arabia.  However, Iran’s lack of interest in a production freeze delayed the meeting, and it did not occur in March.

On March 16, the Qatari minister announced that there would be a meeting in Doha, Qatar of major oil producers on April 17, 2016.  This meeting was held as scheduled, and involved 18 oil producing countries. Chief among these were Saudi Arabia, Russia, Qatar, Oman, and other OPEC countries.  After meeting for 12 hours, the countries could not agree on a freeze.  The chief stumbling block appears to be Saudi Arabia’s insistence that Iran be part of such an agreement.  However, Iran is determined to bring its oil production back to pre-sanction levels before it is willing to discuss or implement a freeze.  Iran declined to attend the April 17 meeting.

Prior to the meeting, WTI was selling for just above $40 per barrel.  While oil initially sold off by several dollars after the collapse of the potential agreement, it then rebounded and closed above $40 per barrel on April 19.  Since then, the price of oil has mostly been in the $40 to $45 per barrel range.

OPEC met again on June 2, 2016, and took no action on a production freeze or cut.  The main stumbling block was the inability of Saudi Arabia and Iran to agree.  Even so, oil prices have continued to rise since then, and have exceeded $50 per barrel.

While a freeze agreement would have lent some stability to the markets, it is doubtful that it would have had a major effect on oil prices.  A freeze at January 2016 levels, while it would have had an important psychological effect, is not the same as a cut in production.  And Saudi Arabia, most importantly, is still not willing to cut production, although they have been maintaining their production at a fairly constant level.  It seems that the markets are doing the job of narrowing the gap between supply and demand, along with occasional supply disruptions.  This should prevent oil prices from falling below $30 per barrel.  In reality, it seems likely that oil prices will increase to the $55 per barrel range by September 2016.

For a full discussion of this subject, including its effect on the flowmeter markets, please see our Q4 2015/Q1 2016 Market Barometer.  Go to www.worldflow.com for full details.

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