Trader, analyst and instructor with a 6-year experience

Oil prices fall as supply mounts

By Kira Iukhtenko, FBS

Crude oil prices extend the decline, pressured by the intensified concerns on the global economic slowdown. Brent price fell below the 90 dollars per barrel mark for the first time since June 2012. What reasons are lying behind the current price drop and how long will this trend last?

OPEC leaders – Saudi Arabia, Kuwait and United Arab Emirates – could have stopped the oil prices decline by lowering the output volumes. Cartel members will meet to discuss the current situation on September 27. Willtheytakemeasurestocutextraction? This is another question.  

These days the oil cartel is torn apart by a no-nonsense price war. “Poor” oil exporting countries feel uncomfortable with low prices: their budget deficit will widen dramatically. “Rich” countries, on the other hand, support lower prices: this is the way they increase export competitiveness in the context of growing supply in United States.

US clearly have a finger in the pie: in the current geopolitical setup they are interested in hurting the Russian oil-dependent economy. There are a couple of historical examples: in 1990-s Washington cooperated with Saudi Arabia to drop energy prices. That could have contributed to the Soviet Union break-up.

How deep will the oil quotes fall? Saudi Arabia economy, Middle East oil giant, would feel comfortable with 85 dollars per barrel. The Kingdom is ready to offset low prices with output growth. Meanwhile, extraction of 70% of the US oil resources is cost-effective with a price of 75 dollars per barrel. On the assumption that output keeps on growing and demand in China and Europe keeps on falling, we could see prices at 85-83 dollars per barrel by the year-end. 

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