The oil industry, with its history of blasts and busts, is in its most profound downturn since the 1990s, if not prior. Earnings are downstairs for many companies that made huge profits in the recent past, driving them to decommission more than 66% of their rigs and harshly cut investment in production. Scores of organizations have gone bankrupt and an expected 250,000 oil workers have lost their jobs. The root cause is the tumbling price of a barrel of oil, which is declined more than 70 percent ever since June 2014.
Prices recovered couple times a year ago, however the cost of a barrel of oil has effectively sunk for the current year to levels not seen subsequent to 2003 as an oil glut has taken grasp.
What is the current price of oil?
Brent crude (international benchmark) is trading at around $40 a barrel on Monday. The American benchmark was at around $38 a barrel. Here are few of the reasons that oil prices are heading lower.
1. Iran Returns
In spite of heavy penalties imposed by the US officials against anyone trading with Iran, that nation has still managed to keep on producing oil in the course of recent years. Sanctions against Iran have existed in various forms ever since the eighties when religious fundamentalists overthrew the West-friendly Shah of Iran and committed a series of terrorist attacks against Western nationals. However, sanctions sloped up to the point of closing Iran out of the oil markets in January 2012, when US demanded that Iran abandon its program of tests of nuclear weapons. Toward the start of April 2015 Iran consented to an agreement to end its nuclear program and let in universal monitors to prove its dedication. Affirmation of Iran’s compliance will eliminate the sanctions of 2012 and bring Iranian oil to international markets across the globe. . Regardless of being frustrated by US and EU sanctions,, Iran is still capable to produce 2.7 million barrels per day, of which 1 million is exported in different countries and the un-exported 1.7 million barrels meet up domestic demand, but a great percentage is sent to storage.
2. Declining Demand and Oversupply of Crude Oil
The excess supply in the oil business sector could easily be wiped up by increased demand. Nonetheless, there is no great rise in growth anticipated in the world for the following couple of years. Energy effectiveness and investment in renewable energy e.g., solar, has permanently reduced demand for oil in large portion of the developed world. Both the Federal Reserve and the People’s Bank of China have reported that they are ending their loose monetary policies. This free funds pumped around the world overblown the prices of property, stocks, bonds and commodities. Part of the reason the prices of oil rose through 2013 and mid 2014 was basically that the excessive amount of dollars available for use must be put resources into something for the investment purpose. So that money has to be paid back, the asset price inflation of the past two years will be reversed. Also the crude futures declined in late September 2015 given that the global oversupply is rising oil stockpiles. Oil production by year-end 2015 is estimated to rise more than 9.35 million barrels for every day, higher than the 9.3 million barrels each day estimated in February 2015. This demonstrates that supply is actually increasing not just the market is oversupplied. Also the oil inventories have risen more than estimated. The Energy Information Administration (EIA) reported on September 30, 2015, that U.S. commercial crude oil inventories rose by 4.5 million barrels from the earlier week. At just about 500 million barrels, U.S. crude oil inventories are at the highest level in at least the last 80 years, bringing a decline in prices.
3. The Strong US Dollar
The solid U.S. dollar has been the principle driver for the declining price of crude oil over the most recent couple of years. Even the dollar is at a 12-year high against the euro, leading to appreciations in the U.S. dollar index and a decline in oil prices. This puts the business sector under a great deal of weight because when the dollar value is strong, the value of commodities falls. If we see the prices, the global commodity prices are usually in dollars and go down when the U.S. dollar is strong. For example, the rush forward in the dollar in the second half of 2014 created a sharp fall in the main commodity indexes.
4. Russia Produces More
Analysts have pointed out several times that oil prices fell significantly around the time that Russia invaded the Ukraine and the EU dithered over forcing the sanctions that the USA required. Although Europe did ultimately go alongside with the strategy of punishing Russia through trade restrictions, their reluctance to actually hit hard has destabilized US strategy. Looking at the success of an restriction on oil sales in bringing Iran to the negotiating table, the US government, the hypothesis goes, determined to dishearten the price of oil in order to bankrupt Russia and force it to cancel plans to take over the Ukraine. The Russian economy is heavily dependent on oil & gas exports, since it has a small booming industry and is not capable to equal the West in the progress of technology. Saudi Arabia also has a reason to complain about Vladimir Putin’s behavior. The Saudis loathe Bashar Assad, the President of Syria and want to see him overthrown. American and European governments seemed eager to play along with this policy until the Russians threw their support behind Assad and European determination folded. Without any significant allies to share the burden, the USA cancelled their planned invasion of Syria. The Saudis, therefore, intended to take matters into their own hands and distorted the price of oil with the intent of harassing Russia, not US frackers. Vladimir Putin and his administration have complained so often that the oil price fall was intentionally aimed at attacking the economy of Russia. However, the steadfast determination of impracticable quotas haunted the Russian mindset as an hang over of the Communist era. Putin wants money to continue his magnificent and locally popular policy of reassembling the Russian Empire. The Russians are not to bend to market forces and so have made up the deficit in their budget caused by falling oil prices by pumping out extra oil. The Russian desire for income indicates they are unlikely to create a tactical cut in oil output. Therefore, increased production adds to the descending pressure on the prices of crude oil.