Market Forces?

[sevenOP]

Can market forces explain why a barrel of oil has dropped over 50% in the last 6 months?

or anyone reading this of course.

[factor-fiction]

A lot of it is just in the mind- people feel prices will go up or down and buy/sell accordingly.
There is probably an over supply underlying all this, mainly due to all the energy from fracking in the US

[factor-fiction]

I haven't read this but it seems to cover the issue
http://www.vox.com/2014/12/16/7401705/oil-prices-falling

[factor-fiction]

I think OPEC's decision not to restrict production was a factor too
Another article here
http://www.theguardian.com/business/2014/dec/07/oil-price-down-opec-american-shale

[Hypognosis]

Much political mileage is being made by Obama about "freeing America from the yoke of middle eastern oil sources", again in reference to shale oil.

Ironically, if the price drops too far, the recovery costs of shale reserves make them uneconomic again (they were known about for decades).

Is this latest dip because Libyan wells are back online? Might be worth a google.

[New Judge]

Oil has been over priced for forty years and much of the cause of this was the West's capitulation to the oil producers' ridiculous demands in the early 1970s which saw the price of oil quadruple (to the heady heights of $12 per barrel) in a few months. Recent developments have seen a glut of oil (exacerbated, as has been mentioned, by the fracking revolution in the USA) and market forces have driven the price down

[sevenOP]

The US was still almost self-sufficient in oil in the 1970's NJ and could have got the little they needed elsewhere, so maybe 'market forces' are dependent on the petrodollar country ?
So finally 'market forces' have asserted themselves ? ¦ - )

[atalanta]

Some pundit recently claimed that OPEC was trying to force the frackers out of business, so that OPEC can get their (near) monopoly back.

[EDDIE51]

^^There is truth in that.
The glut is largely due to Saudi Arabia refusing to reduce production.
Saudi has far more oil than the whole of the rest of the world put together.
The Saudi fields are well established and they can increase production by just 'turning up the taps' they can afford to sell at a lower price and still make profit. They know that they will still have huge reserves long after the rest of the world has run dry.
They will never admit it but one reason they want to reduce the price is to 'Punish' Russia. Russia supports the Saudi's two arch enemies in the Middle East , Syria and Iran. They reason that if they keep the oil price low it will force Russia to cut it's expenditure on supporting their 'enemies'. They know that Russia needs an oil price of $100 a barrel just to break even so at moment Russia is losing $ millions a day. Russia only has oil and gas sales to raise foreign currency so the Rouble is falling in value.

[Old_Geezer]

The price difference is more to do with politics than the market. Recall there is an oil cartel. It takes someone to see more benefits in reducing prices than in agreeing to more short term financial gains. Then the price drops.

[atalanta]

Another sidelight - where terrorists/freedom-fighters/islamists/rebels ( call them what you like) in places like Libya have taken over the oil fields, this move by OPEC may reduce their income ( and ability to buy weapons) significantly.

[EDDIE51]

^^ It's not OPEC, it is Saudi Arabia going it alone. Saudi has in effect destroyed OPEC by refusing to cut production and increased it instead .
Saudi has such low production costs due to it's fully developed infrastructure and huge reserves that it can live with an oil price as low as $40 a barrel. Shale oil costs $80 a barrel to produce and Russian oil costs $100 a barrel just to break even. North sea oil costs at least $60 a barrel to produce and there are already redundancies announced on the Aberdeen oil production fields and projects cancelled that will lead to many more!
Yes, Alex Salmond would be telling a very different story if the campaign for Scottish independence was being fought to day! His main campaign argument would be lost . Scottish oil losing $millions a day is not a good selling point for independence.

[factor-fiction]

Thanks Eddie- that's an angle I hadn't thought of (although I had wondered why OPEC hadn't on this occasion cut back on production to keep the price up). I think you are probably right as to the Saudi's aims

[Hopkirk]

I think this article tells you the real reason.

http://www.bbc.co.uk/news/blogs-echochambers-29651742

[sevenOP]

atalanta>"Another sidelight - where terrorists/freedom-fighters/islamists/rebels ( call them what you like) in places like Libya have taken over the oil fields, this move by OPEC may reduce their income ( and ability to buy weapons) significantly."

Good point atalanta, and I've not seen that idea anywhere else. ®

And good point EDDIE about one reason being Saudi punishing Russia for its Iran and Syria support; but your way off on Saudi reserves being so large and cost of Russian oil production:
"The oil production cost in producing fields in Russia ranges from $10-$16 per barrel. The oil production cost in new fields in Eastern Siberia is estimated $22-$26 a barrel.Middle East ranges $2-$5 a barrel."
http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0CDMQFjAE&url=http%3A%2F%2Fwww.petrofinder.com%2Fdealgate%2Fdown_load_deal.php%3Fdeal_no%3D258&ei=bNm8VIj6Fofdat-cgdgG&usg=AFQjCNFd8bhGROxwcVOmT3yfkWtgAQLScQ&bvm=bv.83829542,d.d2s

http://en.wikipedia.org/wiki/List_of_countries_by_proven_oil_reserves#Countries

The last paragraph of your Link probably tells us the real answer Hopkirk:

"It's human nature to speculate about the schemes of behind-the-scenes players when the stakes are so high. It can also be comforting - a much preferable alternative to a system where the health of nations is determined by the random permutations of fate and the chaotic fluctuations of an uncontrollable market."

Second decade of the 21st Century and the Foreign Exchange Markets, the Stock Markets and even 'market forces' are still untamed.
Thanks All who answered.

[factor-fiction]

>Second decade of the 21st Century and the Foreign Exchange Markets, the Stock Markets and even 'market forces' are still untamed.
That has always been the case and will always be so in our lifetime and beyond

[ToraToraTora]

Yes, the middle east are over producing, more supply = cheaper. Simples!

[sevenOP]

TTT, does that mean over twice as much total oil became available ?

[ToraToraTora]

no, it doesn't work like that, it's not proportional. If the supply exceeds the demand even a little the price plummets.

[Hypognosis]

Is it purely academic that the price drops by 'X' amount just after a tanker has set off?

Is the cargo paid for before it leaves port and the petro companies just take the loss on the chin?

Also how many weeks' sailing is it between Saudi and Europe (and the US)? ie How long before each successive crude-oil price drop feeds through to pump prices?

@Hopkirk

I liked that blog piece. A pity it didn't speculate about the effects on Venezuela as well - it's (reputedly) subsidised to cheapnis inside the border but sold at revenue generating prices to outside countries. This may have been a riot prevention measure.

Cynics might say that riot prevention is why US pump prices are so low (compared to what we tolerate). Hence no significant market pressure to develop more efficient engines. If they did away with gas-guzzler pickup trucks and SUVs, the middle east oil producers would be left scratching their posteriors.

Or not, seeing as how China and India's growing middle class are going to be going car crazy in the near future.

[ichkeria]

It would be nice to think that the oil price fall was the result of a "secret war on Russia" but the reality is that it's a combination of factors, chief of which are those arising from the fracking phenomenon. Saudi Arabia in particular wants to keep the price low, as it can afford to, to try and price it out.