One Sentence That Sums Up The Challenge For US Oil Markets

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Guy Bentley Research Associate, Reason Foundation
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Crude prices enjoyed a bump Monday primarily thanks to U.S. oil company Baker Hughes reporting a dip in the number of active rigs for the third week running, according to the Wall Street Journal.

The past year has seen the price of crude cut in half with strong production across the world flooding the market with cheap energy. The economic slowdown in major economies such as China has translated into a significant fall in demand, creating a perfect storm for a price drop.

With prices lower than most had forecast just two years ago, and no signs of a sharp pick-up in demand, oil producers are looking to cut back sharply on production to stay afloat. Oil companies will seek to stave off further price declines and stabilize the situation, according to statements from Germany’s second largest bank.

Commerzbank managed to sum up the state of the market in one sentence:

The incipient decline of production in the U.S. in particular will herald in a long-term and fundamental bottoming out process on the oil market.

If Commerzbank is correct, we could soon see the limits of recent oil price drops, with the industry able prop up a floor through which prices won’t be able to fall for some time.

“In the absence of any clear trend, the oil market is likely to remain under the influence of external factors such as the equity and foreign exchange markets, and to remain volatile”, Commerzbank added.

A big loser from the dramatic energy price drops, according to Commerzbank, could also be one of the most talked about developments in the market in recent years — shale. “The low oil prices are taking their toll, the main shale oil producing regions in particular likely to suffer lasting damage.”

France’s third largest bank weighed in on the debate arguing that the timing of production cuts suited leading oil producers.”The decrease in US oil production will pick up pace in the near future, for one thing, hedging deals agreed at higher oil prices are expiring, while for another the low chances of the environment improving in anything like the near future are likely to prompt creditors to pull the ripcord”, said Societe Generale.

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Guy Bentley