Why Oil Prices are Likely to Stay Low for a Long Time

Oil prices have been a major topic of discussion for quite some time. In fact, the discussion started as the bottom fell out of the oil market in late 2014. Since then, oil has continued on a rough path. Now, many people are asking, “How long will it be before oil starts to pick up at a sustainable rate?” The reality is that this isn’t likely to happen for quite some time. Today, we’ll talk about why we can expect to see a continuation of low oil prices for years to come.

The Primary Factors In Oil Price Movements

To understand why oil is likely to continue declining for a long time, you’ll have to understand what causes price movement in the commodity. In the case of oil, the price of the commodity is heavily dependent on supply and demand. Essentially, when supplies are low and demand is high, we tend to see gains in the value of the commodity. Adversely, when supply is high and demand is low, we tend to see declines.

Why The Oil Market Crashed In The First Place

Keeping in mind the information above, figuring out why the oil market crashed is relatively easy to do. The simple answer is that supply climbed and demand fell. However, if you follow my work here or elsewhere, you know that I don’t generally stop at the simple answer. Here’s what happened…

  • Supply Climbed – Mining for oil changed quite a bit. Instead of drilling for the commodity being the only option, we started to see shale production in the US and Canadian oil sands. This increased supply dramatically. That in conjunction with the fact that several nations around the world started to produce more oil through conventional methods made supplies rise dramatically.
  • Demand Slipped – While supply was rising, demand started to fall. Economic conditions around the world started to turn negative. As a result, consumers started to look for ways to save money. One of the first places that consumers look to save money during poor economic times is oil. After all, small changes like a couple of degrees on a thermostat or driving a few miles less per day make a big change in a consumer’s pocket book. So, we started to see demand slip as a result of economic concerns.
  • Storage Backed Up – As a result of the climbing supply and slipping demand, oil stockpiles around the world climbed to a crucial point. If the stockpiles continued climbing, there would soon be nowhere to store excess oil.

As a result of the issues above, oil’s price had to fall. The decline in price would increase demand, which in turn, would cause supply to decline. Since the crash in the oil market, we haven’t seen any substantial growth in the value of the commodity as supplies remain high and demand remains relatively low.

Why Oil Is Likely To Stay Low For Quite A While

First and foremost, this oil crisis didn’t happen over night. In fact, it took several years to get to this point. As a result, it’s hard to imagine that a solution to the crisis would be found in a short amount of time. The bottom line here is that economic conditions around the world are still in negative territory. So, consumers will continue to pinch their pennies. Also, the world is still producing far more oil than it uses. While the rig counts around the world are down, it hasn’t proven to be enough. This vast imbalance in supply and demand is going to take a drastic change in economic conditions as well as a drastic change in production in order to come to an end. These types of changes simply don’t happen over night.

What Do You Think?

Where do you think oil is headed? Let us know your opinion in the comments below!

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