One of the most important events in the markets in 2015 was a sharp drop in oil prices by 40%. What are the main causes of fluctuations in oil prices, and how does their increase or decrease generally affect the economy and stock markets?
At the end of 2015, oil prices fell to their lowest level in 11 years. Understanding the causes of fluctuating oil prices can often be confusing to those outside the commodity market. However, despite the fact that oil is a much more difficult commodity to analyze than any other commodity, there are several common factors that affect its price around the world.
Supply and demand
One of the main factors, as with any commodity, stock or bond, is the law of supply and demand, which causes prices to change. When supply exceeds demand, prices fall and vice versa. World oil production is predominantly controlled by OPEC - the Organization of Petroleum Exporting Countries, which has a major influence on fluctuations in oil prices. The purpose of the organization is to maintain a stable oil price. OPEC pledged to keep prices above 100 USD per barrel for the foreseeable future, but in mid-2014 the price began to fall. It fell from 100 USD per barrel to the current 40 USD per barrel. And OPEC itself has become the main reason for cheap oil. She refused to reduce production, which led to a drop in prices.
OPEC as a producer has a huge impact on oil prices, but on the other hand, the price also depends on demand. Demand from major oil importers such as Europe, China, India and Japan also affects prices. For example, falling oil prices could be driven by lower demand in these regions coupled with stable supply from OPEC. An oversupply of oil could cause them to plummet.
Mining cost
The cost of production also causes prices to rise or fall. While oil production is relatively cheap in the Middle East, it is much more expensive to produce it in, for example, Canada or the UK. Once the supply of cheap oil is completely used up, the price of oil can rise if only oil remains in regions with expensive production.
Weather and natural disasters
This is another factor causing fluctuations in oil prices. Like most commodities, seasonal changes in the weather affect the demand for oil. In winter, more is consumed for heating, while in summer people drive more and use more petrol. Although the markets know when to expect these periods of increased demand, the price of oil rises and levels off with the start of the season each year. Extreme weather conditions (hurricanes, tornadoes, thunderstorms) can have a physical impact on production facilities and infrastructure, reducing the supply of oil and causing prices to rise.
Political situation
Political instability in oil-rich areas can also cause price fluctuations. For example, in July 2008, the price of a barrel of oil hit an all-time high of $140 due to consumer worries and fears about the wars in Afghanistan and Iraq. As another example, if an oil-rich area becomes politically unstable, supply markets respond by raising the price of oil to keep supplies available to the highest bidder. In this case, only the realization of the lack of supply can raise prices, even with the same level of production.
US dollar exchange rate
In addition, it is important to note that oil is quoted and traded internationally in US dollars. In general, the fall of the US dollar increases the demand for oil and its price. On the contrary, the strengthening of the US dollar reduces real incomes in consumer countries, reducing the demand for oil and its price.
When it comes to the impact of higher oil prices on the economy, economists are divided. From one point of view, the higher cost of energy carriers raises the cost of producing and transporting everything. With rising costs slowing down production, business revenues fall and the stock market declines.
From the consumer's point of view, rising gasoline prices scare those who, seeing the loss of their purchasing power, reduce their spending on non-essential goods, which negatively affects the sales of companies. It also has a negative impact on economic growth and stock prices. The counterargument to this opinion is based on the reasons for the rise in prices. The most likely reason for the growth is high demand. A strong economy increases the demand for energy, which raises their price.
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If the economy is growing, the stock market is likely to perform well as well. Thus, the rise in oil prices and the rise in the stock market are the result of the growth of the economy.
When it comes to the impact of falling oil prices on the economy, it generally means good news for oil importers like Europe, China, India, Japan, and bad news for exporters like OPEC, Latin America and Russia. Oil importers benefit from falling prices as the cost of oil imports falls. This reduces the current account deficit. For oil exporters, in turn, the fall in oil prices has the opposite effect - it reduces the cost of their exports and leads to a decrease in the trade surplus.
Falling oil prices are helping consumers lower their cost of living and save money that can be spent on more expensive purchases. In most cases, this means lower transport costs, resulting in a lower cost of living and lower inflation. In fact, the fall in oil prices is a free tax cut. In theory, a fall in oil prices could lead to an increase in spending on other goods and services, as well as an increase in real GDP.
However, it can also cause deflation and reduce consumer confidence, and instead of spending, they are more likely to save. In this case, falling prices instead of increasing spending leads to a decrease in inflation and the likely onset of deflation, which can be extremely problematic to get out of. Another downside of low oil prices is that it can put a damper on investment in alternative "greener" forms of energy, such as electric cars. Falling oil prices could stop the decline in car use and lead to more traffic congestion and the negative impact of gasoline use on the environment.
Speaking of the law of supply and demand, in general, we expect that OPEC will still prefer volume to price and increase production in the near future. However, due to continued heavy spending on capex cuts, we also expect healthy growth in demand, along with a negative impact on US and non-OPEC non-US production. We also do not believe that the lifting of sanctions on Iran will lead to a significant decrease in oil prices. After decades of underinvestment in oil exploration and production infrastructure, Iran will need to attract billions in foreign investment to bring hydrocarbon exports back to pre-sanction levels. And global investors are likely to be extremely cautious before investing because of the legal and other issues that these investments may face.
In this regard, we expect the supply/demand balance to shift from oversupply in 2015 of 1.9 million barrels per day to 0.6 million barrels per day in 2016 and ensure a balanced market in 2017.
According to our estimates, the average oil price in 2016 will be 45 USD per barrel, in 2017 - 60 USD, and in 2018 and beyond - 70 USD. Of course, unforeseen events, such as political instability, natural disasters, etc., can lead to more serious fluctuations and high prices in the world oil market.
Gunta Simenovska,
Head of Sales Support Department of Business Development Department of SEB Bank
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Sources: SEB, Marketwatch, BBC, Forbes, International Monetary Fund, Investopedia
Why do ordinary people like scary movies so much? It turns out that this is an opportunity to pretend to experience your fears, become more confident and even let off steam. And this is true - you just need to choose for yourself an exciting horror film that will make you feel like you should worry about the characters.
Silent Hill
The story takes place in the city of Silent Hill. Ordinary people would not even want to drive past it. But Rose Dasilva, the mother of little Sharon, is simply forced to go there. There is no other way out. She believes that this is the only way to help her daughter and save her from a psychiatric hospital. The name of the town did not come from nowhere - Sharon constantly repeated it in a dream. And it seems that the cure is very close, but on the way to Silent Hill, mother and daughter get into a strange accident. Waking up, Rose discovers that Sharon is missing. Now the woman needs to find her daughter in a cursed city full of fears and horrors. The trailer for the film is available for viewing.
Mirrors
Former detective Ben Carson is going through hard times. After accidentally killing a colleague, he is suspended from his job at the New York Police Department. Then the departure of his wife and children, addiction to alcohol, and now Ben is the night watchman of the burned-out department store, left alone with his problems. Over time, occupational therapy pays off, but one night round changes everything. The mirrors begin to threaten Ben and his family. Strange and frightening images appear in their reflection. To keep his loved ones alive, the detective needs to understand what the mirrors want, but the problem is that Ben has never encountered mysticism.
asylum
Kara Harding, after the death of her husband, is raising her daughter alone. The woman followed in the footsteps of her father and became a famous psychiatrist. She studies people with multiple personalities. Among them there are those who claim that there are many more of these personalities. According to Kara, this is just a front for serial killers, so all her patients are sent to death. But one day the father shows his daughter the case of the vagrant patient Adam, who defies all rational explanations. Kara continues to insist on her theory and even tries to cure Adam, but over time, completely unexpected facts are revealed to her ...
Mike Enslin does not believe in an afterlife. Being a horror writer, he is writing another book about the supernatural. It is dedicated to poltergeists living in hotels. In one of them, Mike decides to settle. The choice falls on the infamous room 1408 of the Dolphin Hotel. According to the owners of the hotel and the residents of the city, the room is inhabited by evil that kills the guests. But neither this fact nor the senior manager's warning scares Mike. But in vain ... In the room, the writer will have to endure a real nightmare, from which there is only one way to get out ...
The material was prepared using the ivi online cinema.
Oil prices have been steadily moving down over the past months.
Since the local peak for the Brent brand in June 2014. the fall in oil quotations amounted to almost 20%.
According to many experts, this may indicate that a bearish trend has begun on the global black gold market.
What are reasons for the decline in oil prices?
First, the reluctance of OPEC member countries to reduce volumes.
Member States of this organization, in September 2014. daily extracted from the bowels of 30.935 million barrels - the highest figure since August 2013.
And there are no guarantees that in the short term, oil exporting countries will be ready to reconsider their policy regarding the acceptable level of production of "black gold".
Secondly, a significant reduction by Saudi Arabia of official prices for exported oil.
For example, tariffs for Asian partners have been reduced by the Kingdom to 2008 levels. - from 0.6 to 1.2 dollars per barrel.
Investors worry that Saudi Arabia, OPEC's largest oil producer, will continue to lower export prices to maintain its market share.
Thirdly, the significantly increased volumes of oil production by the United States.
According to the US Department of Energy, in September 2014. the production of "black gold" in the country reached 8.867 million barrels per day - the highest since March 1986.
This result became possible, among other things, due to the rapid development of shale technologies.
The International Energy Agency (IEA) does not exclude that in 2015. the daily volume of oil produced in the United States may reach 9.53 million barrels.
This is the highest level in the last 45 years.
Fourth, the expected reduction in global demand for oil by the end of this year and in 2015 in connection with the worsened forecasts for the growth of the world economy.
Fifth, the growth of the dollar against other world currencies and the possible start of an increase in interest rates by the Fed in the near future.
So what will happen to oil prices?
According to experts, in the 4th quarter of 2014. we should expect increased pressure on oil quotes.
High oil production in the world with continued low demand in the face of a slowdown in the global economy is very likely to push oil prices down.
As a result, the market always comes to an equilibrium state.
However, record declines in oil prices do occur from time to time.
Recall that in 1986. and 1998-99. the cost of "black gold" dropped to $10 per barrel in 2008. - up to 40 dollars.
It remains to be hoped that this time everything will go without extremes.
Kuwaiti Oil Minister Ali al-Omair suggested that the fall in prices may stop at $76-77 per barrel.
The Ministry of Finance of the Russian Federation is more optimistic - they admit the possibility of a short-term decrease in the cost of "black gold" to 80-85 dollars per barrel with further stabilization at the level of 90 dollars.
The cost of oil, like other major energy resources, has a direct impact on economic processes in the world. A significant drop in oil prices for countries of consumer countries has become a boon, and for exporters almost a disaster. But is it really so sad? Let's find out what threatens the fall in oil prices in Russia.
First of all, let's look at the main reasons for the fall in oil prices. After all, only by determining the root causes, it is possible to predict the further course of events, and their consequences.
It's no secret that in 2014 there was a sharp drop in world oil prices, which, by and large, continues to this day, followed by short periods of insignificant price increases. This phenomenon is already taking on a long-term character.
The main reasons for the fall in oil prices experts call the following:
Each of the above reasons has a different level of influence on the fall in the cost of black gold, but at the same time they all contribute to this process.
The decline in demand for oil is primarily caused by the crisis that is now taking place in the global economy. This means that the level of production is decreasing, and hence the consumption of petroleum products. First of all, this concerns the slowdown in the growth of the economies of the EU countries and China.
The shale revolution has also contributed to the fall in oil prices. Advanced technologies that allow the extraction of shale oil, previously almost inaccessible, have led to an increase in supply in the market, which cannot but affect the cost reduction.
It would seem that the fighting in the Middle East, on the contrary, should contribute to the growth of oil prices. Actually, this was the case in most previous military conflicts. But this time, various groups of militants, in need of cash, began to sell oil produced in the territories they control at dumping prices. Of course, this fact affects the fall in oil prices, although it is far from being the main factor.
Speculation in the market can affect the fall in oil prices in the short term. In the long run, this factor still plays an insignificant role.
In previous years, the price of oil has skyrocketed. Investors massively bought up oil futures. But as soon as the price began to fall, they began to try to get rid of them just as quickly, which, in turn, added fuel to the fire.
Of course, the objective strengthening of the dollar plays an important role in the fall in oil prices. After all, world quotes are formed precisely in relation to the American currency, and if it rises in price, then other assets fall in price.
To the above list, some experts add political versions. For example, one often hears claims that the fall in oil prices is caused by collusion between the US and Saudi Arabia against Russia. But these versions are conspiratorial in nature and are not considered by serious analysts.
Over the past decade, the world has become accustomed to high prices for black gold. Thus, in 2008, the price of Brent oil reached its maximum and approached the mark of $150 per barrel. True, after the start of the global financial crisis, it fell significantly, but then went up again and, until mid-2014, exceeded $100 per barrel.
But from that moment began its new landslide fall. By the end of 2014, its cost was already around $60. And in February 2016, the price hit a low, dropping below $30. However, at present, the price of oil has again begun to show growth, but it is still difficult to say whether this is a temporary phenomenon or a long-term trend.
Let's now look at the main forecasts of experts on how the price of oil will behave in the near future.
Among analysts there is no unequivocal opinion on this matter. Some of them believe that the cost of black gold at $30 per barrel is the bottom. This will stop the fall in oil prices, and they will go up sharply.
Other experts, on the contrary, argue that the price is quite capable of breaking new records. The most daring of them say that even a price of $20 per barrel may not be the limit. Minor rises in oil prices that occur periodically are considered by experts who share this point of view to be a temporary phenomenon.
Therefore, in the current situation, it is quite difficult to give an accurate forecast about the future behavior of black gold quotes.
Now let's find out what threatens the fall in oil prices for the world economy as a whole and for individual countries. This is very important for understanding the possible economic consequences of this process. Separately, we dwell on what threatens the fall in the price of oil in Russia.
First of all, you need to understand that there are two types of countries in the world oil market: exporters and importers. The former mainly sell the mined black gold, while the latter buy. Moreover, it is not at all necessary that those countries that buy oil do not have its reserves on their territories. Thus, the USA and China occupy, respectively, the third and fourth place in the world in terms of oil production. But, despite this, they are mainly importers of this product, since production volumes are insufficient to cover the needs of these most powerful world economies.
Based on this, we can conclude that for exporting countries, a further decrease in the cost of oil is unprofitable, but for those states that buy it, this is just at hand.
In addition, it should be noted that low energy prices stimulate the development of production. The global crisis slows down the development of economies, thereby reducing the demand for oil. And that means its price. When the price reaches its minimum, it already, on the contrary, has a favorable effect on the development of industry. It is gaining momentum and requires more oil products. This state of affairs leads to an increase in the price of oil. This is how the law of economic equilibrium works.
The economy of all oil-exporting countries, to one degree or another, is negatively experiencing the fall in prices for black gold. But in some states it is completely focused on the export of this raw material, while in others there are other significant sectors of the national economy. Naturally, the first group of countries is experiencing a drop in oil prices in more difficult conditions than the second. These states primarily include Venezuela, Saudi Arabia and other countries of the Persian Gulf.
Revenues from the oil industry make up a significant part of the Russian budget. Although, the share of proceeds from the sale of oil and gas abroad does not exceed 50% of GDP, as some believe, but is only about 16%.
But at the same time, it should be taken into account that many sectors in other economic sectors are financed precisely at the expense of “oil” money. Thus, the financing of other sectors of the economy, and hence their profitability, directly depends on the amount of proceeds from the sale of oil.
As we can see, the real volume of the indirect influence of the oil and gas industry on the entire Russian economy really exceeds 50%.
Now let's find out what the fall in oil prices means for Russia.
As with any country where a significant part of the economy relies to some extent on the oil industry, a further decline in the cost of black gold or stabilization of its quotations at a low level does not bode well.
First of all, we should expect a decline in GDP. How much it will decrease depends on how severe the fall in oil prices will be. Why should such a scenario be expected? First of all, because in the country's GDP a significant part is occupied by direct income from the sale of oil, as well as income in those areas of management in which funds received from the sale of black gold are invested.
In addition, the Russians should prepare for a decrease in budget revenues. It is no secret that a significant part of them are funds from the sale of oil and oil products, as well as taxes on these types of goods.
With a further decline in oil prices, the ruble exchange rate will most likely continue to fall. This, in turn, will stimulate inflationary processes in the country, which means a drop in the standard of living of the population.
But from any, even the most difficult situation, there is a way out. Yes, this way of solving the problem is not easy and takes much more time than we would like.
In order for Russia not to face crisis phenomena caused by falling oil prices in the future, it is necessary to diversify the economy, that is, increase the share of income from industries not related to the extraction and sale of minerals. It must be taken into account that even if oil prices rise this time, this does not mean that after a certain period of time they will not fall again. So the problem in any case, sooner or later will have to be solved cardinally.
Thus, the fall in oil prices in the country's economy causes many negative phenomena, which can lead to rather disastrous consequences. At the same time, the situation on the oil market is an additional factor that forces the government to follow the path of modernization, reducing the share of income from the sale of natural resources in the country's GDP.
If, in the conditions of the high cost of black gold, such a situation could freeze for many years, then the collapse of oil prices forces us to make radical decisions that can lead to a significant growth of the economy.
Over the past few years, many experts have not ceased to wonder why the price of oil is falling and how long the "bearish" mood will last. During the last five years, 4 global declines were recorded in the oil market. "Bearish" cycles have repeated 14 times, and this is from the beginning of 2000. Despite the instability of the situation, the price per barrel has always safely returned to the starting point.
Global drops in oil prices in the history of the market have been tracked in the history of WITI quotes, which, starting in 2011, were supplanted by the Brent fuel brand. There are five in total:
year 2001. By January 19, 2001, the cost of oil was $32.2. By November 5, 2001, the price had dropped to $17.50. For 10 months, the price of a barrel fell by 48.5 percent.
2006 On July 14, 2006, the price was $77. Already on January 18 of the following year, the price reached $50.5. Within 6 months, a price drop of 34.5% was recorded.
Summer 2008. On July 3, 2008, the price per barrel was $145.3. After 2.5 months, namely on September 16, another low was recorded on the indicator - 91.2 dollars.
Autumn 2008. By September 22, after a recent drop, oil rolled back to $120.9, and by December 19, the stop took place at a price of $33.9. In just three months, the cost of a barrel of oil fell by 71.9%.
Spring 2011. On April 29, 2011, the price reached $113.93 per barrel. But on October 4, a new low was already recorded on the daily chart at $75.67. The fall lasted 5 months, the price fell by 33.58%.
Oil is the basis of all energy carriers, on which practically the entire civilization is built. It is simply impossible to imagine modern society without gasoline, kerosene and diesel fuel. That is why the question of why the price of oil is falling is seriously worrying not only economic analysts, but also most people in the world. The situation is of interest to almost every expert in this matter.
Residents of Russia pay special attention to oil prices. This is due to the fact that the fall in the cost of fuel led to a depreciation of the ruble. The dollar is actively growing, and the ruble just collapsed. People stop saving. They either invest in the purchase of household appliances or in improving their living conditions, or convert liabilities into foreign currency at a far from favorable rate.
Despite last year's forecasts, today oil prices are falling. 2014 ended with another decline in the cost of a barrel. The long-awaited trend reversal did not take place, the situation remains unclear.
World prices for Brent oil (this brand is one of the most demanded, a general market analysis is made based on the movement of its price) in January-February 2014 stopped at $107 per barrel. In early October, one barrel of oil could be purchased for as little as $90. This is a significant cause for panic in countries whose economic activity is based precisely on the export of energy resources. At this price, the situation did not stabilize, and by December 11, the price chart drew a new low - $64. Today buyers are ready to pay no more than 59.5 dollars for fuel. It turns out a very interesting situation. The demand for fuel is systematically increasing, while the price is falling.
Unequivocally answer the question: "Why is the price of oil falling?" problematic. The situation was formed by comparing several factors at the same time, which, according to economic analysts, were created artificially.
Venezuela, Iran and 4 other states that are members of OPEC warned about the upcoming fall in prices. According to experts, a significant increase in the cost of a barrel is possible with a reduction in fuel production by only 415,000 barrels. As a result of the rejection of production cuts by Saudi Arabia and Kuwait, the situation escalated. The voices of states have become decisive, since it is Saudi Arabia that accounts for about 300 million additional barrels of oil. The situation was aggravated by the economic recovery of Libya, which finally emerged from martial law and rejoined the ranks of the dominant players in the oil market.
The fall in oil prices was caused by actions on the part of America, since there are a fairly large number of deposits of this mineral on its territory. The government of the state, in order to avoid a shortage, issued a law prohibiting the export of crude fuel. At the same time, the United States has been the main consumer of oil in the world for more than a decade. The huge volumes of fuel that the country bought up supported the cost of fuel. The price of oil per barrel remained at a fairly high level.
The decline in oil prices in September 2014 coincided with an increase in domestic fuel production in America. The daily rate of production stopped at 8.7 million barrels. According to analysts, in the coming months, the figure will increase to 9.5 million barrels. As a result, oil prices are falling, the main consumer has left the arena. Moreover, having found loopholes in the legislation, large companies began to export their fuel for such a volume of oil production that has not been in the country since 1987.
The fall in oil prices has become a real blow to the economies of states that live off energy. Daily fuel consumption is 92 million barrels. Due to the shortage of fuel on the world market, its price was at a fairly high level. A sharp jump in the extractive industry to the level of 93.8 million barrels led to overproduction. The implication is quite obvious. When there are more goods than there are buyers, the price of the product decreases due to the reduction in demand. As long as efficient fuel extraction continues, the situation will only get worse.
The fall in oil prices was also affected by a sharp increase in the dollar. This is due to the fact that the price per barrel is calculated in US currency. With a stable state of supply and demand in the oil market, the price remains static. Considering that the dollar exchange rate is constantly changing in relation to the currencies of the world, the situation on the market described above is from the realm of fantasy. As a result of the rise in the price of the dollar, there is a fall in oil prices, as an expensive dollar allows you to buy more fuel. The fall of the dollar leads to an increase in the price of oil, since more US currency will have to be paid for one barrel. Some countries refuse to sell their oil for dollars. Companies to buy fuel change the currency, which causes an increase in supply and stimulates its fall. It rarely happens that world oil prices and the dollar rise in price at the same time. This is due to the fact that the situation should be accompanied by a reduction in the level of employment in America and good economic performance.
