Where will Falling Crude Oil Prices Settle?
After reaching monthly peaks of $112 per barrel (bbl) and $105/bbl in June 2014, crude oil benchmarks Brent and West Texas Intermediate (WTI) fell to $62/bbl and $59/bbl in December 2014. Today, January 9, 2015 Brent crude is priced at $49/bbl and WTI at $47/bbl.
There are two common reactions to this fall in oil prices.
“OMG—Yes!” is the consumer reaction every time they fill up the gas tank in their gar and the price is a few pennies lower than the last time. But if you are in the oil and gas industry your reaction is likely “OMG—No!” as falling oil prices are the industry’s equivalent of having its paycheck cut in half.
Where will oil prices settle?
That depends upon why they are falling. The logical answer is that oil is a globally traded commodity where prices are set by supply and demand. Oil has traded in a tight band just above $100 per barrel for several years because supply and demand were reasonably in balance around the world and when bad stuff happened there was enough swing productive capacity in the system to make up the shortfall.
Last summer when oil prices were at their cyclical peak of $112 per barrel factors such as the rise of ISIS threatened first Syrian and then Northern Iraqi oil supply, supply growth in the US was continuing to grow but these pluses and minuses seemed to offset so the risk premium of fear that more bad stuff might happen was in the headlines as Russia was destabilizing Ukraine and threatening EU stability, ISIS was marauding through Iraq and North Korea was just being North Korea and not yet fully piqued about “The Interview”
By GARY L. HUNT