Global oil prices have slid in recent weeks, a trend that shows no signs of changing in the immediate future.
The two main benchmarks for oil prices, Brent and WTI, hit their highest levels so far this year in June amid the initial onslaught in Iraq of the Sunni jihadist group Islamic State of Iraq and Syria (ISIS). Fears that the militant group would seize Iraqi oil fields pushed up prices.
Prices have dropped for a few reasons.
ISIS’s advance has come to a halt and fears that Iraq’s oil production would be affected have abated.
Libya has brought some of its oil back online, with August production averaging around 538,000 barrels per day (bpd) — more than double its average daily production from June. Libya’s National Oil Corporation says that production is now topping 800,000 bpd and could exceed 1 million bpd in October.
U.S. oil production also continues to rise. In June, the U.S. produced 8.5 million bpd, an increase of 500,000 bpd since the beginning of the year. Higher production continues to cut into imports, leaving greater supplies on the global market.
Perhaps most importantly, global demand has been surprisingly lackluster. The latest data from the U.S. Energy Information Agency (EIA) shows that refined product (gasoline, for example) inventories are increasing – an indication that production is overwhelming consumption.
A slowing Chinese economy is also putting a damper on crude oil prices. Weak economic data published by the Chinese government showed that China’s import growth slowed for a second straight month, suggesting the economy continues to cool.
The glut of supplies and weak demand is causing problems for OPEC, according to the cartel’s monthly report. OPEC lowered its demand projection for 2015 by 200,000 and in August, Saudi Arabia cut productionby 400,000 bpd in an effort to stem oversupply.
As noted by Steve LeVine in Quartz, cheaper oil could present problems for oil producing countries, which generally rely on high prices to keep their national budgets in the black.
Iran, for example, needs a price of $136 per barrel to pay for its current levels of public spending. Other countries – Nigeria, Ecuador, Venezuela, Iraq – are all facing looming budgetary problems as their required “breakeven” prices are higher than what oil is currently selling for on the market.
Russia needs between $110 and $117 per barrel to finance its spending, which means the Kremlin can’t be happy as it watches Brent prices continue to drop. Combined with an already weak economy, Russia could see its $19 billion surplus become a deficit by the end of the year.
Moscow also won’t like the new set of sanctions the European Union said it will slap on Russia on Sept. 12, which include a devastating prohibition on international oil majors from working on oil and gas projects in Russia’s Arctic. The ban could halt billions of dollars’ worth of investments in Russia and cut into future oil production. ExxonMobil has already begun drilling a $700 million well in Russia’s Kara Sea.
Oil suppliers could be dealing with the problem of low prices for a while.
The EIA predicts U.S. oil production could increase by another 1 million bpd in 2015 to 9.5 million bpd, which would be a 45-year high. That would keep WTI prices as low as $94 per barrel and Brent at just $103 per barrel.