Everything about the oil market – 2015 and 2016 – is peculiar. Oil prices have plummeted, yet production has not. This is defying textbook economics. In some big oil producing regions, output is actually rising. Demand is up too, yet prices keep falling.
How to make sense for this? This particular price collapse is unlike the others, so history is not an accurate guide.
The variable that seems to apply to this particular price collapse is supply and lots of it. Supply has been outpacing demand, which is why any rally since the downturn is short-lived. Prices are down 35% in the last year and about 70% in the last year and a half.
Much of the theory for weak demand is blamed for oil pricing collapsing. It is far more sensible to blame rising supplies. As supply glut builds, oil prices could fall even if global demand stays or rises. On last Tuesday, the World Bank sliced its 2016 forecast from and average crude prices of $37 a barrel, from its previous forecast of $52.
Almost $400 billion of crude oil projects have been suspended. The IEA says energy-project spending fell 20% last year and is on similar course this year.
The best cure for low oil prices is low oil prices as economists say.
Source: Oil is still in demand -it’s the glut that is hurting price by Eric Reguly, The Globe And Mail, January 29, 2016