​Oil drops to lowest point in five year years

Oil prices have fallen to its lowest mark in more than half a decade, dipping below US$50 per barrel.

This is the first time the price has fallen below the price point since April 2009 – at the height of the GFC -highlighting the likelihood of a continuing sluggish market, according to Bloomberg.

Head of oil research at Societe General SA, Mike Wittner, told Bloomberg“the market is continuing to price in weak fundamentals in the first half of this year,” adding that “there’s also been a return to risk aversion because of Greece [and its potential exit for the Euro], something we haven’t seen in a while”.

Much of this fall has been driven by technological leaps and the ability to tap in to shale oil, particularly in the US, which has seen this market grow 90 per cent since 2008 ( with forecasts seeing it grow from .32 tcf of gas in 2000 to a projected 9.69 tcf by 2020), and a global over-investment in oil production.

Even in the face of this slide OPEC decided to not cut production late last year, further weakening prices as well as its power as a cartel as many of these member nations see the price slide below their break-even watermarks.

For the first time since its formation in 1960, two of the top three oil-producing countries (the United States and Russia) are outside OPEC. While OPEC controls low-cost oil, it has lost supply control at higher prices and cannot push prices up like it could in the 1970s – or at least, not without stimulating a lot more supply from elsewhere.

According to the US Energy Information Agency, the United States now produces 11.1 million barrels of oil per day – about the same as Saudi Arabia (11.7 million barrels) and Russia (10.4 million barrels).

This new situation is a free-for-all between the three major players: OPEC (led by Saudi Arabia), US-based private oil companies, and Russian state-controlled oil firms. All three groups have the same reason for wanting to produce more – they need or want more money in the short-medium term to satisfy their current spending, shareholder and salary expectations. Amid this competition, cutting production on purpose isn’t such an attractive move.

Despite this gas production projects around the world are on the increase and this will result in more falling prices, just as it has done for iron ore and coal.

Whether this results in a positive effect on the hip pocket of Australian consumers will depend on our domestic distributors, rather than on global trading prices.

Close to home Australian gas has seen predictions that the domestic price will triple by 2021, making everyone wonder what happened to all the promises of cheaper gas thanks to the bevy of new liquefaction plants.

Internationally this falling price is likely to only continue to shake Russia’s already weakened economy, as the nation saw the Ruble fall dramatically over the last six months, setting the country up for an economic crisis as it continues to pump out more oil.

Again Capital, an US-based hedge fund, told Bloomberg “this bearish syndrome will continue until the drop in prices either stimulates economic growth or there is a supply response”.

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