The downturn in the oil industry has been in the top list of the most discussed topics. The downturn in oil price is not just bad news, but its good news too. Consumers are able to save a few bucks in their pocket because of the low prices. However, the story is different for the oil producers. Whether its the companies or countries that depend on exporting crude oil. The cost of a barrel of oil has fallen about 70 percent since 2014.2016 has seen the lowest price drop since 2003. Oil prices have been in the range of $70 – $100 a barrel but in 2016 the price went as low as $27 a barrel. The low prices have caused loss of jobs, a halt in exploration and production, bankruptcy etc. A few factors have contributed to the drop in prices.
Why the drop in oil Prices?
Increase in oil production
Overtime the US has almost doubled their production which has kicked out countries that were once exporting oil to the US. This means countries like Saudi, Algeria and Nigeria are forced to sell to other countries. Canada, Iraq, and Russia have also increased production.
Iran sanction Lift
Mid January 2016, the Iran sanction was lifted after the United Nations nuclear agency declared Tehran fulfilled the commitment to scale back its nuclear program.
Technology advanced cars
The demand for fuel is lagging behind because vehicles are becoming more energy efficient. This doesn’t have as much effect as the other points mentioned. However, it’s a factor to consider in the future.
Russians and Saudis have agreed to freeze production. Major producing countries will meet on the 17th of April in Qatar, to discuss a possible price freeze to stabilize the price. Some analysts say we might see a possible increase in oil price. At the moment, global oil supply is at 95.4m Barrels per day vs. a demand of 93.9m barrels estimated. So it’s a 1.5m barrels per day over supplied. According to Mike Kelley from the seaport global securities, he sees a balanced demand and supply in 2017.
Who is affected?
Oil producers have been hit really badly during this downturn and also companies that support energy sectors have seen their share prices drop. The oil industry can be grouped into the upstream companies and downstream companies and the integrated companies. The upstream companies have been affected the most because they are involved with exploration and production of crude oil. On the flip side, downstream companies deal with refining and distribution. Since the price at which the upstream companies sell is regulated by the market they are hit the hardest, and most of their cost of production are fixed. However, most large oil companies are integrated companies meaning that they have both upstream and downstream operations. These companies have experienced a hit due to their upstream operations. Companies such as Exxon, Chevron and BP are integrated oil companies. Until an agreement is made on regulating production of crude oil, the prices are likely to remain low.