Why is the Price of Brent Crude Oil Plummeting?

Sweet, light and lucrative, brent crude serves as a major benchmark for oil prices across the globe. While the market is usually relatively stable, prices have started to plummet over the past few weeks. Earlier this month, the price of brent crude dropped to a seven year low of just US$40 a barrel. The tumble triggered serious concerns over the future of crude, and the possibility that oil prices could continue to drop in 2016.

Global markets start to tremble

The extensive losses shook up the global stock market and raised new questions about whether or not producers can withstand a drawn out price crash. The U.S. Energy Information Administration was one of the biggest responders, cutting its 2016 forecast to $50.89 a barrel. This represents a notable drop from its previous estimates of $51.31. Bank of America Merrill Lynch also showed its concern, slashing its New Year forecast from $53 a barrel to just $48.

“That’s probably the biggest controversy about when the oil-price recovery begins, is that very high level of inventories,” explains Ed Cowart. As a portfolio manager at $32 billion company Eagle Asset Management, he knows the industry inside out. He asserts that in order for prices to start rising, “you’ll really need to see some indicators that supply and demand are really tightening up.”

What’s triggered the crash? Mushrooming crude oil inventories and petroleum products are a key cause, with US stockpiles rising for a consecutive 10 weeks. This is highly unusual given the fact that historically, supplies tend to dwindle in the lead up to winter.  

The future of crude

So what’s on the horizon for brent crude? According to analysts and investors, a pickup isn’t expected until at least late 2016. And that’s the positive outlook. In response Wall Street banks are rethinking their price forecasts, with some even calling for lower than average oil prices in the New Year. With higher interest rates on the horizon, the strengthening of the dollar could also contribute to pushing oil prices even lower.

The rise in global oil inventories goes hand in hand with an increase in gas production. This has led to the need for a more meticulous approach to capacity allocation. In the article ‘Capacity Allocation and Nominations’ the consequences of increased production within the gas industry are explored, with authors focussing on issues encountered by shale areas with insufficient infrastructure.

Image via Flickr Creative Commons. Credits: Ahmad Nawawi?