Why oil is so low right now

DUBAI: Regional tensions between two of the world’s largest oil producers should mean that the price of oil rises, right? And winter weather should increase the demand for oil, translating into higher prices. And continued fighting in Libya, and ongoing operations against Daesh in Iraq should also be reflected in higher oil prices, right?

Wrong on all counts.

In trading Thursday, benchmark Brent crude sold at under $34 (Dh124,88) a barrel in prices not seen since 2003.

So why is conventional thinking about oil being turned on its head, with the commodity losing almost a quarter of its value, down from a surprisingly low $42 a barrel a month ago, to Thursday’s lows?

Eighteen months ago, oil was trading at $115, and Thursday’s trade represents a decline in excess of 70 per cent over that period.

Here are factors influencing the price:

There’s too much oil on the market right now

The basic principle of any market is supply and demand — the lower the supply, the higher the price. In simple terms, oil producing nations in Opec (Organisation of Petroleum Exporting Countries) have declined to cut production, pursuing a Saudi Arabia-driven strategy to maintain market share.

So the oil producers should pump less?

That’s not going to happen — in fact, the opposite is true. Currently, Saudi Arabia produces 10.23 million barrels daily, while Iran produces around 2.88 million barrels daily. With economic sanctions, imposed more than two decades ago on Tehran over its nuclear programme, being gradually lifted, Iran is likely to produce 500,000 barrels more daily, adding to the glut.

What about tensions between Riyadh and Tehran?

Normally, the events that saw the Saudi embassy in Tehran torched would lead to concerns over regional political instability — pushing up the price of oil. After the embassy burning, Brent spiked up to $39, but has since continued to plummet. If anything, the discord means that whatever chance before that Opec would reach an agreement on cutting production, that is now at slim to none.

The China factor

Commodity traders are looking closely at China and are worried about a slowdown there. At the beginning of 2012, for example, China was importing some 5 million barrels daily. Eighteen months ago, when oil was at $115, demand from China was in excess of 7 million barrels daily. Indeed, most of Iran’s daily production goes to China. But China’s economy is cooling, and energy analysts expect its daily demand this year to decline to just above the 6 million mark.

US inventories

There’s a lot of oil in the US right now. According to Bloomberg, stockpiles at Cushing, Oklahoma — the delivery point for US benchmark crude — rose to a record while nationwide stockpiles remain about 100 million barrels above the five-year average, according to Energy Information Administration data.

Energy saving

Drive across Europe and you’ll see more windmills producing greener, clearer energy. That means less oil burnt to generate electricity. And that car you’re driving — it’s also more fuel efficient.

Climate change

In Western Europe and across the US, weather patterns are in flux. Trees are budding, cherry blossoms are blooming in Washington, the weather is warmer — a combination of El Nino and the polar vortex over Canada staying there. There’s less demand for heating oil when it’s the warmest winter on record.

And there’s still a lot of shale oil

Falling crude prices were supposed to eliminate shale oil producers, but that hasn’t happened. Producers simply got rid of old, inefficient rigs and cut their production costs. The volume of production from new wells per rig has risen by 48 per cent over the past year, and those new rigs are now tapped into “sweet spots”, and are using better technology to extract oil from cracks in shale.

Daesh, Iraq, Libya and Syria.

Simply put, because the civil war in Syria has been dragging on for so long, it’s not a factor anymore in the price of oil. Besides, Syria is a minor producer anyway. And turmoil in Iraq over Daesh has already been factored in. The same is true for Libya, though recent fighting near the oil-producing facility at Ras Leneuf simply had no effect on a market that is awash in oil.