Brent crude, the main benchmark for oil prices, has slid to a five-year low of around $65 a barrel. It has fallen by almost 45% since June. The latest dip was due to poor data from China, a key source of demand, which followed oil cartel Opec’s decision last month not to curb production.
Opec has now once again trimmed its 2015 demand forecast and raised its estimate of non-Opec supply. Analysts are still scrambling to cut forecasts. Morgan Stanley thinks Brent could reach $53 next year.
What the commentators said
Opec’s charter states that the cartel’s aim is to ensure stable oil markets, said Bank of America Merrill Lynch. It now seems to have given up on that mission and is letting the market find it own level. This means there could be “a huge structural pick-up in oil price volatility”.
Don’t be surprised to see price swings of $50 per barrel or more happening regularly in future. As far as the fundamentals go, the oversupply on the market won’t disappear in a hurry. “Oil demand and supply are pretty inelastic.” Output and demand take around half a year to respond to price changes.
Cheaper oil is “a shot of adrenaline to global growth”, said The Economist. A $40 price decline shifts around $1.3trn from producers to consumers. The typical US motorist, who spent $3,000 filling up a car in 2013, will be approximately $800 a year better off, the equivalent of a 2% pay rise.
But the shale-drilling sector, which is largely responsible for the global glut, faces a “shake-out” as drilling becomes uneconomical amid tumbling prices.
Many shale producers are heavily indebted and “a rash of bankruptcies is likely”. According to one estimate, 15% of firms are already losing money.