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Could years of lower oil prices lie ahead?

by , 29 September 2015

Commodities have had it hard over the past few years. But oil managed to stand its ground, until just over a year ago that is.

Since then, the oil price has slid lower and Brent crude oil struggles to trade above $50 a barrel for long periods of time.

So what's going on with the oil price? And is a recovery in sight?

Let's take a closer look…

What’s going on with the oil price?

The oil price continues to trade at around half the price it did a year ago.

Between the autumn of 2011 and the winter of 2014, Brent crude oil traded with a $10 range of $110 a barrel.

Since then, oil traded below $50 in January, managed to climb back to $65 in autumn and hit a six year low of $43 in August.

Have a look at the price of Brent crude over the past year…

Chart of Brent crude oil price

As with all commodities, supply and demand determine the oil price. Currently there is just too much supply and demand is down.

The reasons for a lower oil price

There are several reasons, Simon Wilson in Money Week explains…

The US’s shale oil has led the nation to cut imports, leaving exporters in Africa and the Middle East looking for new customers in Asia.

Other key oil producing countries, like Canada and Iraq have upped production.

Global demand is down thanks to slowing economies and moves to other fuels and renewables.

How long with the oil price remain low?

Analysts believe the oil price could stay depressed for years. In a leaked note to The Wall Street Journal, OPEC doesn’t see a recovery back to $100 a barrel for another ten years.

Peter Andurand, a hedge fund manager, doesn’t see oil doing much over the next couple of years and thinks it could fall further to $30 a barrel in the short-term.

In the past OPEC cut production to help buoy prices, but as OPEC nations battle with the US for market share, this isn’t happening this time around.

What it means for oil stocks

Oil companies are struggling with lower prices. Firms are cutting spending and putting a stop on projects. This means companies lowering or cutting dividends until the oil price recovers.

Chances are mergers will continue as dominant players take advantage of the current situation.

So there you have it. Why years of lower oil prices could lie ahead.

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Could years of lower oil prices lie ahead?
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