Who Happened to Oil Prices?

Like a late night TV soap star, oil is one of those characters we all love to hate, but can’t seem to live without.  Always teeming with drama, oil recently has fallen more than 25% from its high and plunged energy into a bear market.

The wild ride upward started back in the summer of 2017 and ended in October as crude topped out at over $87. Six weeks later, oil has dropped to just over $66. A few months ago, industry pundits were touting oil’s optimistic outlook and forecasting it’s rise to over $90. Oil demand was strong and its price was rising accordingly. So, what happened?

There are a number of factors to consider:

1. The Slowing Global Economy: Over the past months, a number of companies missed earnings expectations and issued warning statements about slowing growth in Q1 2019. Most of these concerns are related to China, tariffs and interest rates. In light of this, Moody’s and OPEC also recently modified their expectations with respect to growth and oil demand. Slower growth equates to reduced demand for products, less trucks and cars on the road, and a fall in oil prices.
2. Fracking Over-Supply:  The previous increases in oil prices reinvigorated oil producers, and made the technique of fracking economically viable.  In 2018, the U.S.produced 25% more crude oil than in 2017 at its fastest pace since the 1950s, increasing supply and driving down the price.  
3. The Strong US Dollar: Oil is priced in U.S. dollars, and countries that wish to buy oil, need to buy U.S. dollars first. With the U.S. dollar increasing in value, the overall cost to purchase oil has gone up, pushing down demand and the price of oil.
4. U.S. Iranian Oil Sanctions Exemptions: In early November, the U.S. re-imposed economic sanctions on Iran, designed to compel better Iranian behaviour in the Middle East. While originally hoping to cut Iranian oil sales to zero, the decreased supply could have led to higher oil prices and a slowing in the U.S. economy. This concern led to exemptions for eight of Iran’s largest trading partners (China, India, South Korea, Japan, Italy, Turkey, Greece and Taiwan). The result has been additional supply added to the market, driving down the price.
   

The oil market is historically cyclical and prone to wild swings. While these may seem extreme in the short term, they are not unprecedented and for the time being, we should all enjoy lower gas prices. Industry experts such as Goldman Sachs’ Jeff Currie, are predicting crude will bounce back to $75 by Q1 of 2019. Just like a soap opera villain’s alleged death, higher oil prices will return. Or just end up being a bad dream.