The five key factors affecting international oil prices

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When discussing the most important economic stories of 2014, the sharp drop in crude oil prices was one of the key factors to note, and it is expected to remain a matter of close attention for investors in 2015 as well. In fact, the futures price of West Texas Intermediate crude oil on the NYMEX has experienced the steepest decline since 2008, dropping by around 50% from its highest level in the past 52 weeks in June. The futures price of Brent crude oil has also fallen by more than 50% compared to its highest level in that period, and all five key factors affecting international oil prices have seen similar declines. So, what factors are at work behind the sharp drop in oil prices? Shale oil: To discuss the issue of falling crude oil prices, one must first start with the surge in supply. And when talking about the surge in supply, U.S. shale oil is of course indispensable. The persistently high oil prices ultimately helped drive the revolution in hydraulic fracturing technology, which in turn led to a boom in North Dakota and other areas rich in shale oil. Against the backdrop of falling oil prices, energy companies have halted various expansion plans, which naturally affects the production of shale oil and other forms of unconventional oil, needless to say. The key question is to what extent shale oil production will be sensitive to this decline in oil prices. “In fact, in the initial stages we might even see an increase in production, as many shale operators have to struggle to survive, and cash flow has become even more crucial for them than before. ”Analysts at JBC Energy wrote in a research report, “This may force them to reduce follow-up work on oil wells that have already been drilled and fracked, while focusing on new wells in their most promising oil fields.” ” Price wars: This is not only the case in the United States; similar situations exist in other major oil-producing countries as well. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) continues to hold a dominant position; in the view of many strategists, this is nothing more than a brutal price war aimed at destroying producers of shale oil and other high-cost crude oils. At the highly anticipated meeting in November, the cartel decided not to change production levels, thereby triggering another round of sharp drops in oil prices. Carsten Fritsch, a commodity strategist at Commerzbank, said, “This rules out the possibility of a rapid recovery in crude oil prices. Additionally, new supplies from northern Iraq and Libya are expected to enter the market soon.” ” On December 22, Saudi Arabia’s Oil Minister Naimi stated more explicitly that OPEC would not reduce production even if oil prices dropped to $20 per barrel. Weak demand: Of course, on the supply and demand equation, the situation on the demand side also works against oil prices. The slowdown in China’s economic growth and the European economy’s slide into recession have clearly exerted significant pressure on demand growth. In December, the International Energy Agency reduced its forecast for global crude oil demand growth in 2015 to 900,000 barrels per day, a decrease of 230,000 barrels. Julian Jessop, an economist at Capital Economics, said that the decline in oil prices that has taken place has had a certain positive effect on demand, but only to a limited extent. Meanwhile, OPEC’s projection at its December meeting was that global crude oil demand would fall to 28.9 million barrels per day in 2015, compared to 29.4 million barrels per day this year. Geopolitical concerns subsided. In the first half of 2014, oil prices were on the rise, and this was largely due to geopolitical tensions – Russia’s annexation of Crimea, the Syrian civil war, and Sunni uprisings in northern Iraq. However, as investors concluded that all of this did not constitute an immediate and direct threat to supply, the risk premium disappeared. For example, in Iraq, despite the turbulent situation, the oil fields in the southern part of the country are still operating normally. However, these concerns cannot be completely set aside for now; the possibility of a spike in oil prices following another geopolitical shock still exists. A strong dollar: Commodity prices and the dollar exchange rate generally exhibit an inverse relationship. The goods are priced in dollars, and when the dollar is strong, these goods become more expensive in the eyes of those who use other currencies. The ICE U.S. Dollar Index, which is compiled from the exchange rates of the dollar against six other major currencies, rose by more than 12% in 2014, with an increase of around 1.9% alone in December. Binky Chadha, Deutsche Bank’s lead global strategist, believes that a strong U.S. dollar is the main reason for falling oil prices. He emphasized that, after all, the surplus supply of crude oil is the result of a long-term situation that has developed over time; it certainly wasn’t created overnight. The claim that investors \"suddenly woke up\" in mid-last year and only then realized this situation is clearly unfounded. Chada pointed out that the sharp drop in oil prices occurred shortly after the dollar began to appreciate at an accelerated pace. Earlier, Chada said in a interview with reporters that the appreciation of the dollar over the past five months is something that would normally take one and a half years to achieve, which makes it exceptionally difficult for oil prices to find a bottom.