Oil prices, after reaching new highs for 2016 during last week (over $46 per barrel), experiences a moment of corrections in negative, showing once again how volatile is its price. After an encouraging rise in the wake of the fires in Canada and the unrest in Libya, the oil price has returned to fall in Friday’s session.
In Canada a large forest fire broke out and interrupted the production of oil in that area. Several pipelines have been closed as a precaution.
The price of oil, as already mentioned, has seen a rise not only because of natural events that are unleashing in Canada, but also for the disorders in Libya. The decline in oil production in Libya, which has been going on for some time, could suffer a further braking, given the difficulties between the two internal political factions.
In addition to this, the US production continues to decline, with the latest data showing a -8% from mid-2015, always for barrels produced on a daily basis.
The sharp rise in oil prices in recent weeks, accompanied by a gradual decline in US production, has led many to hope that there is a light at the end of the tunnel and to fuel expectations for a continuation of the rise in the price of crude oil.
However, there are many doubts about the rise in oil prices and the fundamental force of the rally. Here 3 reasons why the price of oil may continue to decline.
- The meeting between OPEC and non-OPEC producers in Doha, held in Qatar last month, has failed to agree to the freezing of production. From then on, the OPEC oil production increased to 32.64 million barrels per day in April 2016.
Oil production will increase with the approach of summer and to ensure exports at current levels. Such growth, however, would be seen only in a few months, driving down the price of oil.
- The indicators showed the production of China’s oil falling, which means that – unless the demand decreases – China will need to import more in the future. His business partners (Saudi Arabia, Kuwait etc …) will expand their sales in the Chinese economy.
When these players start to produce more, the market moves accordingly to that and the price of oil undergoes a renewed decrease.
- The question of US citizens will never be enough to ease the burden of the excess of barrels of crude oil in US. The problem is that to 300.000 barrels less per day of US production corresponds to 30 million barrels in over production for the OPEC.
To really make a difference and groped to solve the critical issues of excess global oil supply, US production is expected to decrease much more.
Furthermore, what has so far moved the oil industry in America until now has been the availability of banks to continue to give loans to many oil companies. Some producers among the weakest had to declare bankruptcy or sell part of their business, but many others are still struggling to stay upright.
The problem is that the more the price of oil is approaching to $ 50 a barrel, the more manufacturers will be pushed to reopen dormant plants and to produce more oil. An increase in US production could, in turn, establish the way to a new collapse in oil prices.
It seems hard to believe that oil prices may go in the range $ 25- $ 30 range, whether going up to a range of $ 50- $ 60.
Without a serious change in the market, the oil price rise cannot be defined sustainable under any circumstances.