Has the oil price hit its floor?

By Stefanie Heerwig via Multibriefs 

Video credit: Center for Strategic & International Studies

Abdulla Al-Badri, secretary general of OPEC, announced this week that oil prices might have reached their floor and could even rise to up to $200 per barrel in the near future.

This is a surprising comment, given OPEC’s resistance to decrease its oil production and complaints by struggling oil exporters like Nigeria and Venezuela, of which the former had to devalue its currency in late November 2014..

In fact, Al-Badri’s comment was in response to the biggest one-day gain in oil prices since 2009. Brent rose almost 8 percent and finished above $50 per barrel while Western Texas intermediate crude jumped by 7 percent to $53 per barrel.

Over the past half-year, oil prices had been falling from an astronomical height of over $110 in mid-June to almost half of that at the beginning of January 2015.

The jump in oil prices is indeed good news for cash-strapped net oil exporters like Nigeria and the U.S. shale industry, which has faced harsh cuts in revenues after years of high oil prices since 2007.

In the U.S., the oil rig count has been continuously declining since November 2014 while the shale industry is staggering.

Oil field services provider Baker Hughes announced in mid-January to lay off about 7,000 workers, 11 percent of its workforce. Meanwhile, Halliburton told investors that it was also planning to lay off workers, as the rig count has fallen by nearly 15 percent over the past months.

But this plunge in oil prices might only be a temporary phenomenon, according to Al-Badri and some industry specialists.

One reasons for this is that while the oil price has been falling, the industry has cut back investments in future oil production which will contract global supply in the medium to long-term. On the other hand, rising global demand (partially due to lower oil prices) will do its bit to drive up prices even faster.

Ellen Anderson, executive director for the University of Minnesota’s Energy Transition Lab, for instance, notes that “it’s possible that we are at a bottom, but (near term) I don’t see this as a signal of a sustainable trend.”

The majority of market analysts are however very cautious about overly optimistic prospects and confirm that it will still take some time until the oil price fully recovers.

The oil price might have hit its floor, but U.S. oil production just hit its 31-year high of 9.2 million barrels per day.

Equally, despite Al-Badri’s empathetic comment, Saudi Arabia is not planning to reduce its production in the near future.

What therefore needs to happen is that the natural decline in production due to current low investments has to squeeze global oil supplies. This must happen, sooner or later.

 About the Author

Stefanie Heerwig

Stefanie Heerwig is a an international energy consultant and development economist. Her work has focused on fossil fuel subsidies and extractive industry governance in developing countries. She holds a BA (Hons) degree in economics and politics from the University of London’s School of Oriental and African Studies.