Q&A: Oil Price Slump Temporary amid Changing Supply Dynamics

Rigzone: Given weaker-than-expected global demand, and with high storage and production rates in the United States, wasn’t the drop almost inevitable without any countervailing forces to offset the imbalance?

Arnold: Other commodities have taken a pretty big hit in the last 18 months or so, in large part because of the fall-off of the market in China. Without sufficient demand, prices were likely to have come off eventually. I think weaker prices in about three years would have been even more likely than now, however, assuming Brazil strengthened as a player, Iraq had resolved its issues, and sanctions on Iran were lifted. Then, you could have millions of additional barrels coming on within the 3-to-5 year timeframe. But to have this much happen this quickly … I don’t have a good explanation for it. 

Rigzone: How are producers reacting, given the reality of $50/barrel oil? 

Arnold: I think one of the things that’s going on right now, in part because the market really seems to be in shock, is that everyone is hoping the other guys will drop out, and then prices will strengthen. But as long as [everyone is waiting for others to quit], they’re still all continuing to produce. Also, at the first sign of losses, some investors might have bailed out of the market, thus accounting for some of the steepness in the price curve.

Rigzone: Are their geopolitical issues that could arrest the fall and send prices higher? Some analysts have noted that because OPEC (Organization of Petroleum Exporting Countries) countries fund social programs through their oil sales, it’s only a matter of time before lower prices affect them, too.

Arnold: It’s evident in Venezuela already. There were problems there even with $100 oil. They have almost nothing else for support except for China and Qatar, and whether they can cover it at $45 or $50, I don’t know.

There are other geopolitical effects from the drop in oil prices. In Asia and in Europe, for example, prices for much of the natural gas supply are linked to crude oil prices. To the extent that natural gas prices might be lower in some markets because of the link to oil, it probably hurts our competitive advantage. When we’re dealing with $3 and $3.50 natural gas, and Asia is dealing with $16 or $17 natural gas, and Europe is at $12 natural gas, that gave us such a tremendous competitive advantage for bringing heavy industry back home. But to the extent that Asia might get down into, say, the $12 range, and Europe could fall into the $8s, you don’t have quite the pressure to reindustrialize the United States, or the opportunities that you had before.


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