The price of crude oil fell below $90 per barrel last week – a milestone the market has not seen in over two years. Crude Oil WTI (West Texas Intermediate) closed at $85.82 and Brent crude oil dipped to $89.90 before rallying slightly and closing the week just over the $90 mark at $90.21.
The main cause is basic supply and demand. According to the U.S. Energy Information Administration (EIA), U.S. oil production grew by 3 million barrels per day in the period from January 2011 to July 2014, equaling the amount of global supply disruptions and keeping oil prices relatively stable.
Meanwhile, OPEC nations — including those in the Middle East — have not dropped production levels, while Russia must keep oil money flowing to keep their economy afloat despite widespread sanctions. Moreover, Libya has resumed significant production despite its own geopolitical turmoil. Consequently, global oil supplies are robust by historical standards
At the same time, global demand is falling. China’s sharp growth has slowed considerably and demand in other parts of Asia is relatively slow as well. Growth in the Euro zone is flat, significantly decreasing that area’s demand for oil. America’s economy is growing, but the growth is slow and not enough to pick up the slack in demand.
Certainly, this is good news at the consumer level. Gas prices are dropping over recent weeks, down to a statewide average of $2.93 in Missouri to a high of $3.62 in California in the 48 contiguous states, $3.87 in Alaska and $4.15 in Hawaii. Lower transportation costs should also trickle down to consumer goods, as well as lowering costs for businesses.
This development is good news for global economies as well (assuming your economy is not dependent on crude oil sales). According to Andrew Kenningham, a senior global economist with Capital Economics, every $10 drop in oil prices results in transferring 0.5% of the world’s GDP away from oil producers and toward oil consumers and provides a 0.2-0.3% increase in global demand of goods and services.
However, if you take the broader view, the fact that world demand for oil is down might be viewed as bad news for the global economy. Until alternative energies make a more significant contribution to the world economy, low demand for oil will tend to correlate to slower growth.
Oil industry analysts are bearish in the short term. The normally optimistic PIRA Energy Group has reportedly predicted oil prices are likely to fall further in the near future. EIA cut their forecasts for the growth of crude oil demand, and very few of the recent world economic reports suggest that economic growth and increased crude oil demand is likely to change anytime soon.
However, it seems unlikely that OPEC will sit back and let prices continue to fall. As of this week, OPEC is still predicting world demand of oil to grow by a little over 1 million barrels per day in 2015, showing no change from their previous forecasts.
If they do not cut back production, they may well drop hints at doing so in an attempt to spook the market into higher prices. OPEC’s next meeting is at the end of November, so we are likely to see their strategy emerge relatively soon.
If you are thinking about taking advantage of the relatively low oil prices as an investor, you may not be at the optimum point to get in, but you probably are not far from it. You can sift through oil-related stocks and energy-sector mutual funds for relative undervalued bargains, or you can try your hand at exchange-traded funds (ETFs) that trade in oil futures and are therefore more directly sensitive to the price of oil. Frequently— but not always — oil stocks trade lower when oil prices decline.
Should you go the ETF route, several databases list crude oil ETFs along with their holdings and general philosophy, as well as their performance. With the current price patterns, short holdings are pummeling long ETFs. You will have to decide for yourself how much risk you can handle with oil futures and when you believe prices will rise and the situation will reverse.
On the other hand, if you are not familiar enough with the field of energy stocks or futures contracts to invest comfortably in oil-related financial vehicles, simply sit back and enjoy the benefits of low oil prices as you fuel your traditional vehicle – while the low prices last.