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Oil prices slipped to four-year low of 82.82 US dollars per Barrel

Nov 5, 2014 17:10 IST

The global benchmark, Brent crude oil, dropped 1.96 US dollar from 84.78 US dollars per barrel to 82.82 US dollars per barrel on 4 November 2014. This was the lowest price of Brent oil in last four years, that is, since 21 October 2010.
The price of oil slipped to its lowest because of the decision of the Saudi Arabia, the largest exporter of oil, to cut the sales price to the US.

On 4 November 2014, the state-owned producer Saudi Arabian Oil Co, known as Saudi Aramco, decided to lower the prices for Arab Light relative to US Gulf coast benchmark by 45 cents a barrel.

Besides, it also lowered the prices of medium and heavy grades of oil to the US by 45 cents and extra light oil by 50 cents. However, it raised the prices of oil to Asia and Europe.

Why Saudi Arabia lowered the cost of its crude to the US?
• To discount for the fall in supply of oil to the US where the production is highest in last three years, which has jumped almost 54 percent, on account of shale gas production.
• On account of increasing competition from Middle Eastern producers which are increasingly competing with cargoes from Latin America, North Africa and Russia.
• To defend its market share in Asian economies, who are in the need of cheap oil prices. As mostly all the countries are oil dependent economy. In this scenario, to increase the market share, members of the Organization of Petroleum Exporting Countries are engaged in a price war as surplus supplies spur them to offer discounts.  

Oil production at highest levels
Another reason for the fall in global oil prices is that the global oil production at present at its highest level.
The production in the United States has increased from 8.5 million barrels per day (bpd) in July 2014 to an estimated 9 million bpd. Libyan oil production has increased from about 200000 bpd to more than 900000 bpd. Saudi Arabia, Nigeria and Iraq have all increased production in recent months, and OPEC’s production is at the highest level in two years.
However, as per the projections of the International Energy Agency global oil demand growth for 2014 is only 700000 bpd, roughly half of the total production increase mentioned above.

Oil prices to hover around 80 US dollars per barrel in 2015
It is expected that global oil price are likely to remain subdued at 80 US dollars per barrel in the year 2015. The reasons are:

Production cuts remain unlikely: The only OPEC members with enough flexibility to reduce oil production voluntarily are the United Arab Emirates, Kuwait and Saudi Arabia. None of the other members are in a financial position to take oil production offline. Libya, Algeria, Iraq, Iran, Nigeria and Venezuela all need maximum oil output and high prices to finance their budgets and social spending programs.

Low demand is likely to linger: On the demand side, a bullish oil market is unlikely. North American oil consumption is structurally in decline and has been since the mid 2000s. Chinese economic data points to slowing overall growth and the risk of falling oil demand from the world's second-largest economy. In Europe the structural decline is occurring amid slowing economic growth.

Conclusion
The lower oil prices appear to be permanent. Record-breaking increases in U.S. production, a resurgent Libya, and Saudi Arabia lowering its prices in a bid to keep its share of Asian customers—all of it has combined to knock oil prices down 25 percent since June 2014, and there might be more room to fall.

Is this article important for exams ? Yes12 People Agreed
Read more Current Affairs on: Brent crude oil , four year low , Saudi formula ,

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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