Oil prices seem will average at $50 per barrel in the rest of 2017 and approximately $55 per barrel in the coming year. According to the American Energy Information Administration, this will be the most likely scenario. On the other hand, commodity traders have also made their own predictions for their own futures contracts: they assert that the price could actually be anywhere between $40 and $60 by the beginning of 2018. Suzzanne Uhland previously mentioned what the world has learned ever since the crisis at the end of 1973; however, the behavior of oil prices has been all over the place: prices, for instance, reached since last month’s prediction a staggering 57$ per barrel—that is actually $5 higher than in August.
The price of a Brent North Sea is actually higher than the price of a West Texas Intermediate when traditionally it has always been the other way around. But what causes these swings in crude prices? In fact, oil prices used to be highly predictable according to seasonal changes: they would always spike during spring time—as traders would also anticipate a much higher demand for summer vacation periods—; and once demand had reached its peak, prices would plummet during fall time and, subsequently, winter. So, the question still remains: why are crude prices so volatile? Here are some plausible reasons:
First, the American production of shale oil and other alternative fuels has shown an increase. The American production rate reached a staggering 9.5 million barrels per day just two years ago. Such rate was no less than shocking considering the fact that during that time oil prices were plummeting. This raises the question: why was the United States producing so much crude at much lower prices? Shale oil producers managed to become more efficient in extracting and producing oil. They came across new ways to keep wells operational and open. They did not want, however, to incur in the expenses commonly associated with closing their wells. For them, it actually made more sense to keep producing oil in spite of the fact that prices were falling. Diametrically opposed, less experienced and less efficient producers had to either find a way to cope with such juncture or go out of business. Since many actually found the latter a much better scenario, oil supply experienced a decrease by around 10%. Nonetheless, it also begot a boom in American shale oil.
Meanwhile, gigantic oil wells in the Gulf started to operate. They were not able to stop production irrespective of prices. As a consequence, large and well-established oil companies decided to stop exploring new sources and reserves: it was much cheaper for them to simply buy in its entirety smaller companies.
Thus, American oil production plummeted to around 9 million barrels per day the last year. Today, after seeing the aftermath of hurricane Harvey, oil production in the United States reached almost 9.2 million barrels and it is expected to grow in 2018.
Another plausible reason why oil prices are so volatile is foreign traders. Traders managed to drive up the value of the American currency by almost 25% in 2014. Since all crude transactions are paid in dollars, the strong currency helped cause the vast majority of the 65% declines in the price of oil destined for exports. Many oil-exporting countries base their local currencies to the American dollar; therefore, an almost 25% rise offsets a 25% drop in the price. This global uncertainty is, by all means, a factor that accounts for the strong value commonly associated with the American dollar.
A third reason would suggest that since the OPEC refused to reduce output to actually establish a floor under oil prices, such volatility ended up being promoted. OPEC members decided to cut production by more than 1 million barrels pex by the beginning of the present year. Such landscape dramatically lowered production to almost 33 million barrels per day. But this alleged decrease was much higher than the previous year’s average, which is why prices began rising. On May 2017, OPEC extended the decrease all the way through March 2018, which has also caused a certain degree of volatility in crude prices.
According to experts, within a decade the average price of a barrel will reach a staggering $85. Worldwide demand will drive prices higher. By then, cheap sources of oil will be gone and exhausted, thusly making it way more expensive to produce and extract crude from these wells. By 2040, oil prices will be near $100 per barrel. The United States will inexorably become a net energy exporter country. It has been an importer ever since 1950. Oil production will definitely rise until mid-2030’s and will face a decline in 2050. At least, that is what experts seem to agree upon.
* Featured Image courtesy of Pixabay at Pexels.com