Oil prices hit an 11-year low on Monday, with Brent crude trading at $36 a barrel. Oil has fallen by 70% over the last year, yet global production hasn’t declined as ferociously as previously thought. Some experts, like Goldman Sachs, say that oil could go as low as $20 a barrel. Here’s why:
1. Global Supply Glut Is Expected to Persist Through 2016
Oil supplies are already at record levels. Stockpiles in the United States reached 4.8 million barrels in the week ended December 18. This is the time of year when reserves usually begin to drop.
The supply glut shows no sign of slowing. In fact, Goldman Sachs recently sent a detailed email report, cutting its forecasts for Brent and WTI crude through 2016. The company noted that the oil market is “even more oversupplied” than previously expected. Goldman Sachs expects the oversupply to persist through 2016. Other economists agree that oil will see no relief anytime soon as growing supplies continue to be a problem.
2. Production Levels are Still Too High
At its most recent meeting, OPEC refused to cut production with the intention to protect its market share. But with a ceiling for production, OPEC countries, mainly Iraq, Saudi Arabia and Iran, will continue to drive oversupply. OPEC supplies 40% of the world’s supply of crude, and thus far, has been producing well above the 30-million-barrel-per-day quota it once had.
The Oil Minister of Iran has also vowed to boost output to 1 million barrels per day once sanctions have been lifted. Iran is hoping to regain its market share, which will continue to boost stockpiles and further contribute to oversupply.
Over in the U.S., things aren’t looking much better. The United States was still pumping out over 9 million barrels of oil in late November, and while production has come down, it has not dropped far enough to balance out stockpiles.
Crude stockpiles in the U.S. are still 100 million barrels above the seasonal average.
The Energy Information Administration does expect crude oil production to decline in the U.S. by 400,000 barrels per day next year, which would allow the market to balance out by the end of 2016 or mid-2017. In the meantime, prices could drop to as low as $20 a barrel.
3. Weaker Global Demand
Weaker global demand will also play a role in oil prices possibly reaching a low of $20 per barrel. Fuel efficiency has improved significantly, and unseasonably warm weather has lowered oil demand. A new push to reduce dependence on fossil fuels to protect the climate will also impact demand in the near future.
The U.S. Congress just passed a new budget deal that removed the ban on domestic oil exports, which means that international oil will be purchased at a premium and may result in even more oil flooding the market.
Demand is also expected to be hit by the recent interest rate hike by the Federal Reserve, which will make oil more expensive for foreign buyers.
Growing stockpiles, a failure to cut back on production and weakening demand may drive oil down to below $20 per barrel before the oversupply issue is resolved.