Oil prices have seen worse times, but this time the pressure on the commodity is too much. From the highs of $104 a barrel in 2014, oil prices touched lows of $28 a barrel. Though the prices recovered to $45 a barrel, most commodity experts are of the opinion that oil prices will continue to face downward pressure and are unlikely to see $60 levels any time soon. Some Saudi experts are of the opinion that the era of $100 barrel pricing is over and oil economies will need to adjust themselves with the new situation that affects all oil producing countries.
So, why are oil prices not able to rise. There are multiple reasons for the same. However, we believe that there are three major causes that are not letting oil move up. For one, the rising production of shale oil in the United States has implied that the US does not need to depend on oil producers for fulfilling its domestic oil demand. Reduction of oil prices can be considered as an attempt by the oil producing countries to price out the shale producers in the US and eventually make the entire shale industry unprofitable and unsustainable at these price levels. At $40 a barrel, a shale producer will not have much profit to match with the traditional oil producers. Unless the US Government supports the shale producers, the entire shale industry may face economic pressures and give up and cease production.
Then, there is sluggish demand that is emanating from China amidst fears that the Chinese economy is slowing down. Reduced demand from China leads to an increase in oil inventory levels across the world. Raised inventory is not good for any oil producing country, and is a direct consequence of low demand for oil. Lower demand for oil is causing pressure on oil prices.
Lastly, oil producing countries are unable to come to an agreement in terms of controlling oil production and supply levels. In the past few months, many affected oil economies have tried to persuade the OPEC to cut back production in a bid to support the falling oil prices, but the Saudis have resisted any attempt to cut production. The OPEC wants non-OPEC countries like Russia to also participate in production cuts, and unless all the oil producers agree to a scheduled production cut, Saudi Arabia won’t budge from its stated position.
Countries like Kenya and Venezuala have had turbulent impact on their economies because of fall in oil prices. It remains to be seen if oil prices would ever go beyond $100 again, but for now these are tough times for oil producing countries.