Will Oil Go Lower?

Gasoline and oil prices have been falling for months, amid a glut in supply. The price per barrel for West Texas crude oil was $37.69 as of March 7. While this has led to (and will continue to lead to) ever lower prices at the pump for consumers, the geopolitical impact of low oil prices (as well as the hit to investors with holdings in oil and gas companies) is less positive.

The question for months has been how low prices will go – could they go all the way down to $20 a barrel? Russia and three OPEC nations recently announced they would freeze production in an attempt to drive down the supply.

Forbes contributor Arthur Berman does not believe the measure will be effective. In a column published March 7, he said that the production freeze could help re-balance supply but not until later in 2016, and asserted that, “a return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.”

Berman noted that the freeze did raise the price per barrel from $26 to $36, but while this will mean higher oil revenue for the nations involved, it wouldn’t substantially balance the oil market. Other oil-producing countries, including the U.S., Canada, and Iran, have shown no sign they intend to join a production freeze. In fact, Iran’s oil minister called the freeze “ridiculous.”

Berman also cited further increasing oil storage stocks in his reasoning for why oil prices will not rise substantially in the future, as production freezes will not have a measurable impact if there are still large quantities of oil in storage. He also warned that any further bad economic or political news could drive down prices further.

Some are more optimistic regarding the direction of crude oil prices; a story published on Bloomberg on March 6 predicted that the fear of oil sinking to $20n a barrel had “faded.” It cited production cuts by several U.S. shale drillers in addition to the Russia-OPEC freeze, and a planned meeting of all 12 OPEC nations towards the end of March.

Bart Melek, head of commodity strategy at TD Securities in Toronto, said, “We are seeing pretty significant declines in U.S. production. There is hope that soon an OPEC agreement will come.”

Ed Morse, head of global commodity research at Citigroup, said in an interview with Bloomberg TV, “We might see the real bottom being behind us…eventually we’ll see U.S. supply falling.”

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