Commodity Watch 20/11/2014 – Brent Crude Oil

For the past week oil has been skulking below the psychologically important $80 per barrel line it hadn’t crossed since 2010. Oil is one of the most complex commodities out there, and in 2014 there are a myriad of different factors that are causing Brent Crude to remain at its 4 year low.

The first reason for its decline is well within the oil sector’s control. Currently oil is being overproduced, yet OPEC (Organization of the Petroleum Exporting Countries) has made no move to limit production in order to help drive prices back up. OPEC is the leading cartel in the oil sector, but is by no means alone. If OPEC were to cut their production, the USA would sweep in and eat up the market share, something that is already occurring due to America’s own increased production.

All of this would be fine is oil was in high demand. However, this just isn’t the case at the moment. The IEA (International Energy Agency) reported that 2014’s global oil demand should grow by 0.9%, compared to 3.6% in 2010. Another factor is the USA’s refinement of the fracking process. Despite the many environmental issues with fracking, reports indicate the country could be energy independent by 2020. Due to this, oil producers no longer have the luxury of production restriction in the face of falling oil prices; their main imperative now is long term survival.

Despite this, some of the bigger oil producers are refusing to act in the commodity’s best interests. After remaining tight-lipped over much of oil’s steep decline, Saudi Arabian oil minister Ali Naimi was forced to defend Saudi oil policies after several theories appeared as to why they had made no attempt to prevent oil’s descent. The minster stated that ‘we do no seek to politicise oil’, and that ‘it’s a question of supply and demand, it’s purely business’, after being accused of attempting to harm the Russian economy, and damage the USA’s shale industry. Regardless of these refutations, it has been reported that the Saudi’s feel that can survive with oil at these prices for the foreseeable future, and have no incentive to change its trajectory.

This attitude comes amidst the protracted situation between Russia and Ukraine, and the continually volatile Middle East providing more de-stabilizing factors for oil. On top of this is the USA’s ongoing Keystone pipeline saga. Yesterday the US senate failed to pass a bill that would approve the pipeline that lies between the USA and Canada. With falling oil prices meaning the approval of the pipeline may not be as economically beneficial as it once was, certain factions of the oil sector might be relieved at this pipeline falling through once again. The pipeline would significantly increase the USA’s oil production, and in light of the issues highlighted above, its approval may well have driven oil prices down further.

Looking to oil’s future, there are some important factors to consider. First off is the OPEC conference on the 27th November. Whilst many analysts are predicting that OPEC will make no real move to stall oil’s falling prices, volatility is expected due to the conference taking place on Thanksgiving, when US markets are closed. OPEC are worried about the USA’s increased oil and shale gas production, as it leaves certain members of OPEC out in the cold in relation to the oil market share.

There are some long term positives for oil. As well as increasingly colder winters, the IEA have reported that despite falling demand in 2014, by 2040 there will be a 37% increase in global energy demand, and without ‘heroic’ levels of oil production, energy suppliers may fail to keep up. Yet without some kind of immediate intervention from OPEC or another source, the short term future for oil looks bleak. However if oil can crawl back to above $80 per barrel it might provide the commodity with enough positive sentiment to help it rally.