Oil prices sank on Monday, with Benchmark Brent futures prices at under $90 a barrel – a level that hasn’t been so low since December 2010.
However, if you account for inflation, in real terms, Brent prices are at its lowest point since October 2007.
This increases the likelihood that the Organization of the Petroleum Exporting Countries (OPEC) will cut output.
Oil has always been subject to slow and long cycles in demand, supply, and prices.
The increase in the oil supply and the lack of demand is a response to prices having increased from 2002 to 2012.
It takes a long time for price changes in oil to start to have a significant affect on production and consumption. This would explain why we are only now seeing the impacts of earlier price surges.
Every peak in oil prices since mid 2008 have been lower than the last, indicating that there has been a slow shift in supply and demand, gradually pushing prices down.
Demand for petroleum products is decreasing across the world, especially in Europe – at a time when there is a huge supply of oil in the international markets.
Oil production in the US reached 8.7 million barrels a day, nearly one million barrels a day more than a year ago and the highest production output in almost a quarter century.
Not only has production been increasing in the US, Saudi Arabia increased its output by 100,000 barrels a day in September and Libyan production surged over the past few months by over 500,000 barrels a day.
The Energy Department recently reported that oil consumption in industrialized countries decreased by 200,000 barrels a day in 2013 compared to the year before. The government predicts US consumption to drop by 40,000 barrels a day this year.
Venezuela has asked for an emergency OPEC meeting to talk about the price drop, with Iran asking for production cuts. However, the major voice in the group is Saudi Arabia.
Michael C. Lynch, president of the Strategic Energy and Economic Research consultancy and an occasional adviser to OPEC, told the New York Times:
“If the price stabilizes around here, it’s probable the Saudis will argue to wait until the November meeting when OPEC can cut the output quotas for the first quarter of 2015”
A number of analysts have said that Saudi Arabia, OPEC’s dominant member, may be rethinking its strategy.
Jeff A. Dietert, head of research at Simmons & Company, an independent investment bank, said:
“Saudi comments indicate that it may have shifted from a strategy of holding prices at around $100 a barrel to a focus on market share. That means there is not an immediate floor on oil prices.”
The price drop has caused a significant decline in gasoline prices in the US. On Monday the average price for regular gasoline was $3.20, 9 cents lower than a week before and 14 cents lower than the price one year ago.
