Global crude oil prices have recovered somewhat ― even if tenuously ― from the lows of just a few weeks ago, but they are still only about 30% of their values for the same period two years ago.
While it is unclear just how long it will last, the low oil price regime has failed to bring any significant growth to the global economy and has left many producing companies struggling with dwindling revenues, even bankruptcy. In addition, the often-observed correlation between oil prices and share prices only adds to current market uncertainties.
The current low oil price regime is driven in the main, by a lingering oil imbalance ― excess of supply over demand ― and a sluggish global economy.
Facing substantial loss of market share due to the tight oil boom (mainly U.S. shale oil and to some extent Canadian tar sands), major producing countries such as Saudi Arabia and Russia, which have lower production costs also turned on the spigots to their massive oil casks. The result has been the current supply overhang, which is being exacerbated by Iran’s insistence ― after her recent emergence from a restrictive sanctions regime ― on speedily attaining her pre-sanctions production level.
The global oil imbalance has been on an upward trajectory since 1Q 2014. It is informative that this positive imbalance is not driven by falling demand but by the growth in supply superseding that in demand. Unless this differential growth rate is properly addressed, that imbalance, and therefore the low oil price regime will linger. Continue reading