Executive Briefings

Downward Pressure on Oil Said to Be Likely to Continue

Following OPEC's decision at the end of November to maintain production at its current level, the Brent spot price of oil closed at $70.02 per barrel, down 39 percent from its closing price of $115.19 on June 19, 2014. Similarly, the WTI spot price fell by 39 percent over the same period, closing at $66.15 at the end of November. What's next? Will the price of oil continue to fall, and if so, how far? Will the price of oil level out? Or will it rebound?

U.S. oil production has grown by close to 4 mm b/d since January 2008. This increase is the main reason the price of oil is falling. Given the slowdown in the rate at which world oil consumption is growing and expectations that U.S. oil production will continue increasing, the price could fall even more. Further, it could be a few years before there is any upward pressure on the price of oil. Analysts at Deutsche Bank argue that if OPEC production is not reduced, the gap between world oil production and consumption will grow in 2015, thereby putting downward pressure on the price of oil.

There is uncertainty as to the extent to which U.S. oil development could be deterred by the lower price of oil. The consensus seems to be that as long as the price remains above $65 per barrel, there would not be a significant reduction in development.

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U.S. oil production has grown by close to 4 mm b/d since January 2008. This increase is the main reason the price of oil is falling. Given the slowdown in the rate at which world oil consumption is growing and expectations that U.S. oil production will continue increasing, the price could fall even more. Further, it could be a few years before there is any upward pressure on the price of oil. Analysts at Deutsche Bank argue that if OPEC production is not reduced, the gap between world oil production and consumption will grow in 2015, thereby putting downward pressure on the price of oil.

There is uncertainty as to the extent to which U.S. oil development could be deterred by the lower price of oil. The consensus seems to be that as long as the price remains above $65 per barrel, there would not be a significant reduction in development.

Read Full Article