By: Frehiwote Negash –
With oil prices hitting a six-year low this week, the prevailing thought among industry buffs is that the commodities downturn has entered a new phase as many speculate on what 2015 will hold for oil. The collapse in oil prices has forced companies to slash spending on new exploration projects and thousands of job losses in Alberta leading Premier Jim Prentice to inform Albertans that billions of dollars in public spending cuts are coming with the possibility of a provincial tax on the table. In light of the upcoming provincial budget on March 27, the weak projections being made for oil prices increases the odds of a deeper plunge into the red for Albertans. The lack of consensus overall from strategists and the increasingly volatile geo-political situation in the Middle East has certainly exacerbated the issue. With OPEC’s refusal to cut production at the end of 2014, the possibility of a nuclear agreement between Iran and the U.S, and the current rate of oil production in the U.S, many are speculating that there might be millions of barrels in surplus on the market driving oil prices even lower.
As Nexen Energy, acquired by China’s CNOOC Ltd. announced another 400 cuts jobs in Alberta yesterday and the price of oil hovers just above the $42 per barrel mark, many investors are reluctant to invest oil and from a psychological standpoint are wary of the what the future holds. That raises questions about how low oil prices can fall. OPEC members like Venezuela, Nigeria, Iran and Libya are suffering economically because of low oil prices sending some of these countries into deficit and even potentially defaulting in the case of Venezuela. While Iran’s case is aggravated by sanctions, Russia, a non-OPEC producer, is in a similar dilemma as its economy is being crushed due to the combinations of low oil prices and international sanctions. These countries need OPEC to cut production not only for economic reasons but also their standing internationally as these countries’ fortunes, particularly Russia, are inextricably linked to the price of oil.
As OPEC refuses to cut production, American production has skyrocketed and the surplus has forced producers to stockpile their reserves which are currently at record levels and adding to the problem. When American storage units are filled to capacity, the surplus of oil will have to be sold on the spot market driving prices even lower than they currently are. The view here is pessimistic as cuts in production and drilling have not diminished the global supply but the sentiment here is that oil is poised to return to a bear market.
Source: Toronto Star, Financial Post, Globe and Mail