Former director of International Petroleum Exchange believes that the falling trend of oil price will continue until reaching $60 to $70 per barrel.
OPEC oil basket price dropped from $107 in late June to about $82 per a barrel this week, while West Texas Intermediate (WTI) was sold at a little more than $80 per a barrel.
In total, oil crude price has experienced a 25 percent drop during last four months.
Former director of International Petroleum Exchange Chris Cook blames this sudden drop in global prices, which he has been expecting for some time, on a combination of a flush of new high cost oil supply, and a substantial reduction in both physical and financial demand for oil.
He told Trend on Nov.2 that in every commodity market there are essentially two limiting price levels or boundaries. There is the “buyer’s market” price when the market is over-supplied, and there is the higher “seller’s market” price where the market is under-supplied.
“It has been said that the remedy for low prices is low prices, so that producers with the highest costs shut down production, and the market gradually ‘clears’ from surplus to shortage. Conversely the remedy for high prices is high prices, so that demand is destroyed as consumers cut back, or substitute other commodities, and meanwhile new – typically higher cost – production comes into the market. That is precisely what has happened with the oil market in the last ten years, where the oil price has in my analysis been inflated and supported by ‘passive’ US funds through which investors seek to avoid inflation.”
According to Cook, , who is now a strategic market consultant, oil prices began a long climb in 2005, and apart from a spike to $147/bbl in July 2008 and a collapse to $35/bbl in December 2008, the market price attained and then held seller’s market levels from 2009 onwards.
He added that, “So we have learnt once again that financial support of prices at a seller’s market price level inevitably leads – as it has throughout the history of commodity markets, from tin to coffee, and from diamonds to cocoa – to the mobilisation of new production, in this case of millions of barrels per day of high cost shale oil. But less obvious – albeit equally important – we have also seen US demand reduced by some two million barrels per day while EU demand has also been drastically curtailed.”
According to the U.S. Energy Information Administration’s estimations published on Sep.29, Oil-based products supplied into U.S. domestic market has decreased significantly since 2005.
“So to cut a long story short, I believe that the market price will in all probability continue to decline to – and possibly temporarily through – a buyer’s market clearing level at between $60 to $70 per barrel,” he added.
Cook said that the trend will result in a sharp reduction in high cost projects.
“Naturally, this will lead to high cost projects being shelved whether in shale or deep water, and eventually the market will swing back to shortage again. Perhaps one of the most interesting consequences of US shale oil is that it is now the US, and not Saudi Arabia, which is the swing producer of crude oil at the upper bound of a sellers market. I have never found Saudi pronouncements in respect of either their reserves or production capacity to be entirely convincing.”
The analyst, however, believes that some good can come out of this gloomy situation, as producers and consumers can unite to tackle the problem.
“The outcome is that the boom and bust which is hard-wired into the current market
paradigm will continue in the oil market unless and until producers and consumers take action to bring it to an end through a new global oil market settlement which would be the energy equivalent of the 1944 Bretton Woods conference. I have long advocated such an initiative, and indeed Iranian President Hassan Rouhani proposed a multilateral institutional framework at the World Economic Forum in Davos earlier this year.”
“If my long-standing forecast of a painful fall in the oil price continues to be vindicated, then perhaps a brief window of opportunity will open up to create a sustainable global market in oil and gas based upon energy co-operation and transparency, rather than energy competition and opaque dealings,” Chris Cook added.
