The West Texas Intermediate crude oil contract is trading today near $80 per barrel. In June, the contract was trading well over $100, with many analysts and financial journalists speculating a rise to $125 per barrel. What happened?
Markets need to enhance their understanding of crude oil not merely as a commodity that is central to most businesses, especially in the industrials and transportation industries, but to a scope that encompasses its potential as an economic and political tool. This is most notable in the world’s most famous oil cartel, the Organization of Petroleum Exporting Countries, or OPEC. The members of OPEC, such as Venezuela, Saudi Arabia, and Angola, are extremely reliant on the oil exports for revenue. Market volatility has severely increased since the onslaught of ISIS and the Russian annexation of Crimea. Endeavoring to claw back market share, Saudi Arabia has led OPEC in dumping oil into the marketplace, pushing down the price. In order to access cash to bolster the economy, Russia has decided to sell more oil from its deposits and reserves. ISIS is selling over $2 million of oil a day in the black market to fund its jihadist operations. Thanks to increased utilization of shale oil reserves, the United States is currently producing and distributing massive quantities of oil. Oil exports from Iraq are near record highs. Libya, with its current relative stability compared to the Arab summer, is generating revenue through amplified oil export. On the other hand, the European Central Bank is managing a recessionary environment with its own quantitative easing measures, in order to fend off deflation. Analysts expect GDP and demand growth in China, one of the biggest oil purchasers, to decelerate.
The price of oil has thus been hit doubly by oversupply and flat to weak demand. Luckily for domestic consumers, the drop in the price of crude oil will result in cheaper trips to the gas pump and supermarket. This effect is augmented by a stronger dollar and evidence of deflation according to indexes that measure product input and retail consumption prices. CNBC analysts suggest that the price point of $80 is the new stable equilibrium, as $100 used to be only a few months ago.
- Nicholas Kodati