(London Post) The falling price of oil has caught even seasoned commodity traders off guard. This month, the cost of crude hit a 12-year low due to global oversupply. But some experts believe the market will correct itself. Jeffrey Grossman, a trader at New York’s commodity exchange, sports a gray NYMEX jacket and sits at his station with a cup of coffee that has long since gone cold. He hasn’t had a chance to enjoy it because his phone won’t stop ringing. The price of oil has finally stopped falling and has even started rising again.
Grossman and his colleagues are seasoned from decades in the business. “It (oil) has always been a tough game,” he says. But this time it’s different.
In the first days of the new year, the price of a barrel of oil dipped below $30 (27.71 euros). On at least one commodity exchange in Chicago, a liter of Class III milk trades for twice as much as the same amount of oil.
Oil’s downward spiral has even taken veterans like Jeffrey Grossman by surprise. “We went down much too fast, much too far when you realize where we come from,” he says.
Shortly before the financial crisis, people were afraid demand for oil would reach unsustainable levels and overheat, according to Antoine Halff from the Center on Global Energy Policy at Columbia University in New York. “People thought it has nowhere else to go than up,” he says. “You had the perception that there was not enough supply, that the market was getting hotter and hotter and that there would be a clash, a resource war.”
Reasons for the imbalance
There are several reasons for the imbalance currently plaguing global oil markets. Even in emerging markets such as China, demand has stagnated. Thanks to advances in fracking, the United States no longer needs to import its oil. The International Energy Agency expects global oil consumption to rise by 1.3 percent this year, but that’s 0.4 percentage points less than last year.
Even the boom in shale oil production in the US is playing a role. There, novel drilling techniques have put once-inaccessible energy deposits within the reach of oil companies. Tapping these subterranean reservoirs via fracking is still very expensive, but that could change.
At the same time, competition is growing. “Shale is an unexpected source, that could be the key for competing at low costs,” says Mark Mills from the Manhattan Institute, an economic think tank.
Competition within the oil business getting so stiff has had a lot to do with Saudi Arabia. The monarchy is home to the world’s second-largest oil reserves and is flooding global markets with its seemingly endless supply of black gold.
Initially, it did so with the aim of edging shale oil producers out of the market. Now, its goal seems to be impeding Iran’s re-entry to the market , which could see the Islamic Republic add between 300,000 and 600,000 barrels of oil per day to global oil supply.
As the price of oil dwindles, so do companies’ profit margins. The British oil company BP has estimated that for every dollar the oil price drops, its annual profits shrink by $500 million.
This, in turn, leads to job cuts. Between 100,000 and 250,000 employees in the oil industry have been laid off in the past 18 months. Falling prices have taken an especially large toll on states like Texas, Louisiana, North Dakota and Alaska. Their budgets rely heavily on tax revenues from the oil industry.
The Saudis’ strategy
The downwards trend could be countered if producers would simply pump less oil out of the ground. But there is little belief that Saudi Arabia has any interest in doing so. As many Europeans and Americans see it, the Saudis are willing to protect their market share against Iran at any cost.
But Antoine Halff doesn’t see any political strategy behind the Kingdom’s actions. “I see it as a rational response to this context,” he says. If the price of a commodity drops, selling more of it is necessary to keep profits up – even if such a move only drives down prices further.
“We let the market determine where the equilibrium should be. What we’re seeing now is the market price,” the Saudi foreign minister, Adel al-Jubeir, said in an interview with CNN.
But whether political tactic or market equilibrium, the result is the same. Smaller competitors are being driven out of the market. Antoine Halff believes the market will eventually correct itself. Saudi Arabia is suffering from low energy prices as much as other members of the oil exporters’ cartel OPEC.
Jeffrey Grossman, too, believes that the price of oil has bottomed out. “I am of the belief now we have heard as much bad news as we can out of there,” he says, adding that oil is bound to recover, if only by a few dollars.