Winners and Losers When Oil is $50 a Barrel
Major technological advances in horizontal drilling and hydraulic fracturing (fracking) have dramatically expanded U.S. oil and gas production. By year-end 2014, U.S. daily crude oil production from shale layers had increased 230 percent over 2010 levels, and total U.S. crude oil production had risen 67 percent.
Despite that dramatic, unprecedented growth, the price of West Texas Intermediate ("WTI"), used as a global benchmark for oil pricing, remained between $80 a barrel (bbl) and $110/bbl from October 2010 until late November 2014. The unrelenting and massive increase in U.S. oil supply should have driven down the global price of oil. It didn’t because as these new U.S. supplies were coming online, geopolitical conflicts were flaring up in key oil-producing regions around the world.
For example, there was a civil war in Libya. Iraq faced threats from ISIS. Both the United States and Europe imposed new sanctions on Iran, significantly curtailing its oil exports. All this had the effect of removing more than 3 million barrels per day from the global market, or roughly the same amount that was being added by the United States.
Other factors during this period that kept the price of oil steady include:
- Major supply disruptions in Africa and the Middle East that significantly reduced their contributions to global supply.
- Geopolitical upheaval in the Middle East, Crimea and Ukraine that exerted upward pressure on global crude oil prices.
- The expectation that OPEC would function as it had in the past, as a cartel, cutting oil production and, thereby, stabilizing global crude oil prices.
However, in the last quarter of 2014, Saudi Arabia announced that it would not cut production and that it would not revisit the issue for six months. This was the inflection point, and the market finally began to respond to the increase in supply. A crude oil sell-off began in earnest, and prices began a downward spiral.
In June 2014, WTI peaked at $115/bbl.
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