Oil Expected to Continue Plunge

The U.S. benchmark for crude oil price, which is down more than 25% in the last sixth months, fell below %45 dollars this week. Analysts from Wall Street are expecting the price point to drop to $40 or below.

It comes down to simple economic theory.  The global supply increase has engendered a drop in price. This plunge will continue until it reaches equilibrium.  As the prices will continue to drop in the coming months, American Shale drillers may have difficulty maintaining production levels.

Suhail Al Mazrouei, the Energy Minister of the UAE

Suhail Al Mazrouei, the Energy Minister of the UAE

OPEC is hoping that it can maintain its share of the world’s oil market as American output has increased recently. Suhail Al Mazrouei, the Energy Minister of the UAE, stated recently that he steadfastly believes that the US shale producers will yield to the pressure of the lower prices, and will cut the number of operating rigs. Gulf members of OPEC have reiterated Mazrouei’s statement saying OPEC will not be the ones cutting production, thus bolstering the price, any time soon. Back in November, OPEC announced that will continue to target 30 million barrels per day.

Some experts believe that oil prices could drop as low as $35 a barrel very soon as both demand and supply lag behind, as they are responsive to, dropping prices. American output is at its highest level in more than thirty years. This increase is largely attributed to drilling the shale formations in Texas and North Dakota. US production went to more than 9 million barrels a day at the beginning of december, the highest level since 1983.

As OPEC is no longer closely controlling the world’s oil supply, the collapse will be greater, and the road to recovery will take much longer than prior downturns according to Jeffrey Currie, head of commodities research at Goldman Sachs.  Additionally, a drop in demand has only exacerbated the situation for oil producers.  Experts are confident that rig counts will start decreasing, but it will just take a few months to begin to see the impact.