Oil is continuing its descent over renewed concerns about global economic weakness and rising stockpiles. There has been increased uncertainty over the past few months as the US economy, the last bright spot in the international scene, began to stumble. On top of that, oil prices have risen over the past few months from decade-lows. In response, oil producers began increasing output once again to take advantage of rising prices.
In the first quarter of the year, oil producing nations met with one another to discuss potential oil production cutbacks. Global investors and policymakers became concerned over staggeringly low oil prices and what appeared to be even further price reductions on the horizon. Energy companies began to pullback on employment and investment, stripping hundreds of billions from the global economy. However, for a while, it seemed as though the discussions worked and oil prices began to rise again as production levels fell, nearly doubling prices in just a few months.
However, the oil price rally appears to be short lived. For a time, industrial accidents in Nigeria lowered oil supply, leading speculators to predict a rise in oil prices. Even further, US shale drilling companies began to recede due to increased operating costs. However, soon after prices recovered, production began to jump again. US companies, in particular, have maintained output levels through increased operational efficiency and cost cutting initiatives. The total number of US rigs in operation has fallen 48 percent from a year ago, but total output levels have only fallen 9 percent. Data released last week revealed rising stockpiles in Cushing, Oklahoma. At the same time, Baker Hughes announced that US firms added more drilling rigs this month.
Other factors are also contributing to oil’s current price descent. Western sanctions on Iran have been lifted, and the nation almost immediately announced it had no intention of reducing production levels. Investors are also less convinced of an interest rate hike from the Federal Reserve, which will likely lead to weakness in the dollar. Because oil prices are denominated in dollars, buyers will have more of an incentive to purchase oil products should the dollar remain at subdued levels. Over the past week, oil for delivery on the New York Mercantile Exchange has fallen over 4 percent. Brent crude oil for delivery in Europe has declined over 3 percent and dipped below the $50 mark. In the futures market, gasoline contracts fell 1.5 percent - landing near $1.536 - while diesel contracts fell a mere 0.1 percent to $1.515.
Although oil prices have significantly recovered from their first quarter lows, analysts are now predicting further price decreases. Economists believe energy companies will attempt to increase production while prices are still relatively high to maintain market share. Preliminary data suggests that US producers will continue to output at heightened levels, while Canadian and Nigerian producers may resume normal operations as well. The only hope for a sustained oil price recovery, according to some, lies in the Asia Pacific. Analysts note that India and China, two major energy consumers, are beginning to experience weaker growth and soft demand. Should these two economies demand less oil, prices may be able to remain near current levels.