photo: Ryan Lackey
A new pricing consensus has emerged on the global oil market, spurred by financial and intrinsic factors.
The fall in prices for ‘black gold’ has been a key shift in the global oil market in recent years. If, in 2014, the average annual price of a barrel of Brent cost $99, then in 2015, it had fallen to $52, reaching $43 in 2016.
One reason for the oil price collapse is related primarily to the curtailment of the repurchasing programme for treasury and mortgage-backed securities, which the US Federal Reserve announced in October 2014. Its launch in October 2008, and its later expansion in March 2009, resulted in an explosive rise in oil prices: between March 2009 and April 2010, a barrel of Brent surged from $46.5 to $78.8. The programme’s second round was staged from September 2010 through to July 2011: the value of a barrel of Brent jumped from $77.8 to $113.9 during this period.
Implementing the quantitative easing initiative led to the release of excess liquidity onto the financial market, which investors then considered profitable to invest in commodity futures. The suspension of these initiatives acted as a signal for them to withdraw from the commodity securities market. This had a similar effect, and the Federal Reserve’s discount rate increased from 0.25% to 0.5%; this was announced in December 2015, and for the preceding six-year period, it had remained at the 0.25% mark. Because of the recovery in the US economy, which grew by 2.4% in 2014 and 2015, a return to the policy of low (interest) rates is unlikely. This implies those financial factors, which previously drove the oil prices up, are now exhausted.
The reduction in oil prices, however, was also caused by intrinsic factors, such as the increased energy efficiency of the global economy, in particular. In the USA, for example, during the period from 1978-2013, real GDP, expressed in year 2009 dollars, increased by two and a half times, from $6.4 trillion to $15.8 trillion. Meanwhile, the average daily consumption of oil remained virtually unchanged, at 18.85 million barrels in 1978, against 18.96 million barrels in 2013 (data from the US Energy Information Agency). China, in line with America, is the world’s second largest consumer of energy resources (in 2013, China’s share accounted for 13.9% of global energy resource consumption, while the USA’s share amounted to 20.5%). According to BP, if, in 1980, 79.9 thousand British Thermal Units (BTU) were required to produce 1 dollar of Chinese GDP, then in 2010, this figure was over three times less (24.7 thousand BTU).
The slowdown in China’s pace of economic growth may also be cited as an intrinsic factor. In 2015, China’s GDP increased by only 6.9%, the lowest figure since 1990; this is reflected in the growth trend pattern for energy resource consumption. According to the International Energy Agency (IEA), from 2015-2020, the average annual rate of growth regarding oil consumption in China amounted to 2.6%, which is almost two times lower than the figure recorded between 2005 and 2014.
The cheaper production of US shale oil is also weighing on prices. According to figures from the North Dakota State Department of Natural Resources (North Dakota is the second largest state in the USA in oil production), between October 2014 and January 2016, the cost of producing a barrel of shale oil fell from $29 to $24. The decline in the share of oil in the global consumption of primary energy sources is having a similar effect: BP maintains that from 1973-2011, this fall amounted to 15 percentage points, namely from 48% to 33%. In line with BP projections, this figure will drop to 28% by 2030.
IndexBox analysts can now argue that a new pricing consensus has emerged on the global oil market, due to the impact of intrinsic and financial factors. The culmination by the US Federal Reserve of the quantitative easing initiative, combined with its rejection of a ‘cheap money’ policy, made commodity futures a less attractive investment prospect; as a result, their price is unlikely to exceed $60 a barrel in the immediate term. Cheaper shale oil production will also push the market down, and significant additional investment is not required to relaunch output.
Curtailing costly oil production projects in the Arctic and on the deep-sea shelf is already resulting in a reduction in the global market imbalances between supply and demand. If, in QII 2015, the imbalance amounted to 2.3 million barrels (96.5 million barrels, against 94.2 million barrels – International Energy Agency data), then in QII 2016, it was only 0.3 million barrels (95.9 million barrels, against 95.6 million barrels). ‘Black gold’ prices, therefore, are unlikely to fall below $30 a barrel.