Price of oil falls to below $49 a barrel – the lowest price seen so far in 2017 with the rising US supply, and row between Saudi Arabi and Qatar behind the fall. Oil price is likely to remain under pressure for years to come.
As the oil price reaches its lowest point this year, Michael Baxter, Economics Commentator for The Share Centre comments:
“The price of Brent crude oil has fallen to under $49 per barrel, the lowest level since the end of November 2016. The price of West Texas Intermediate fell to less than $46.
“A contributing factor to this was a report from US Energy Information Administration predicting that US oil production could rise to a new high, of around ten million barrels a day, exceeding US oil production in the mid-1970s and not far short of oil output from Saudi Arabia.
“The waters have been further muddied by a decision by Saudi Arabia, Bahrain, Egypt and the United Arab Emirates to sever relations with Qatar. When news first broke of the diplomatic row, many analysts assumed the likely response might be a hike in the oil price, but in fact, markets have assumed that it will now be even harder for OPEC to agree on further cuts in oil production.
“There is a wider point. At the moment, oil supply is being supported by shale gas and shale oil rather than what goes on with OPEC. Traditionally, the oil cycle has moved very slowly. When an oil well is shut down because the oil price is low, re-starting it is very expensive. The term used in the industry is re-completing – many of the set-up costs have to be paid for all over again, and time lags are long.
“However, with fracking, the big cost relates to the huge volumes of water and chemicals that are injected deep down underground, and this is largely a variable cost. You could almost say that you can turn fracking on and off like a tap.
“For that reason, there seems to be a ceiling on the oil price at the moment. In my opinion oil is not likely to rise by much for several years, which will in turn hit the profits at oil companies such as BP and Royal Dutch Shell.”