Unlike some earlier periods, the driving factors in oil markets are not price and supply; it is simply a matter of demand. The global markets softened beginning in about June of 2014 and continued through the year end. Economic growth slowed in Western Europe under austerity policies in the large economies. In the expected global growth areas, Brazil, China, Russia, and India, only India maintained a significant level of growth. Prices fell because production, led by U.S. oil shale, rose and did not fall in response to slack demand. The U.S. economy showed remarkable growth in 2014, but it did not translate into increased demand for imports. The current Brent Blend Benchmark is $57.80 a barrel down from a mid-2014 high of about $115. The current West Texas Intermediate Benchmark is $51.69 down from a mid-2014 high of about $105.
Volatility in Global Markets
The trend lines are not clear, and high levels of volatility continue to occur. The Brent made its sharpest increase since 2011 by climbing 9 points this week and 19 points over the past two weeks. The WTI rose by 2.3 points this week. In the mix were some drops and there are mixed factors at work. News and events play both towards higher and lower prices. The U.S. jobs report showed another strong increase; however some analysts suggest the jobs report increases risks of higher interest rates. Libya and other producers have lost capacity due to political events, and the rigs count continues to show declines. Many analysts have begun to notice the numbers of oil rigs taken out of service as an indicator of lower future production. The benefits of volatility may help commodity traders and ETF funds most, since they are in a position to capture small and frequent changes in the market.
Saudi Arabia and OPEC
OPEC did not reduce output to protect prices during the second half of 2014. Their members collectively decided that market share was important to the prosperous members such as the Gulf States. Among those most in need of funds, production cuts would be counterproductive. As a result, many leading producers lost in both crude oil price and market shares. Competition heated for Asian markets where China, India, South Korea and Japan offered hopes of regaining lost revenues. With the United States importing less crude oil, Venezuela, Nigeria, and Brazil each saw losses mount and markets shrink as aggressive pricing from other OPEC members took increasing shares of the Asian markets.
US Oil Markets
US shale production pushed the benchmark crude oil price to near record lows for recent decades. Oil prices fell by nearly half as shale production from North Dakota replaced a significant amount of imports. The U.S. reached records for production at more than 9 million barrels per day. The U.S. became the world’s leading producer of crude oil. The numbers of rigs in production has fallen in recent months, and some large producers have postponed new production sites.
European Oil Markets
Russia has been a traditional source of oil and gas for Western Europe. The war in the Ukraine and European sanctions has made expansion more difficult. Russia was forced to cancel a major pipeline project for Western Europe. The Rouble has collapsed under the weight of the fall of the Brent Blend crude oil price benchmark. The Russian economy assumed oil prices in the range of $105 per barrel. With Russia and many dependent Eastern European economies tied to oil prices and revenues, the economic slowdown caused by falling oil has resulted in further softening of demand.
Asian Oil Markets
The diversified economies of China, Japan, South Korea and India have sufficient economic strength to benefit from low oil prices and maintain levels of demand. Gulf Oil suppliers have focused efforts on increasing market shares in Asia, and the resulting competition has lowered prices further. Saudi Arabia cut prices to Asian buyers by 90 cents per barrel in recent days, and this demonstrates the importance they place on growing market share in Asia.