As the oil price retreats aggressively from historic highs, some are predicting a further fall for the commodity.
Oil reportedly fell around five per cent earlier this week, according to Reuters, after the International Monetary Fund cut its 2015 global forecast in the face of lowered fuel demand and potential contango.
This latest movement has now seen OPEC member Iran predict a continued downwards trend for oil to $25 a barrel unless OPEC action is immediately taken.
Iranian oil minister Bijan Zanganeh said the country sees no likelihood of OPEC action to stem the fall, with the potential for it bottom out at the $25 per barrel mark.
But how did the market reach this apparent impasse of lowering price coupled with inaction?
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 increaseand this will result in more falling prices, just as it has done for iron ore and coal.
These current economic conditions have driven fuel to six year low, reaching a trough of $46.23 earlier this week.
Because we have record oil production now, the falling rig numbers are not creating an immediate positive impact in bolstering prices," Phil Flynn, analyst at Price Futures Group in Chicago told Reuters.
"In fact, they may be creating just the opposite impact; reminding us how poor demand is."
The current market is eerily similar to that found just before the Global Financial Crisis, where oil had spiked from $80 to $147 per barrel and then plummeted to $35 per barrel within six months.
However in what may cheer the market, the price then swiftly drove upwards towards $80 again, all within the space of 24 months.
How this will play out in the current market is yet to be seen.