The old expression, “What goes up must come down” is happening again with crude oil. Over the past several months, we have seen a barrel of crude oil go from $107 back in June 2014 to under $65 earlier this week. And, it doesn’t look like the price of crude oil will be rebounding much higher anytime soon. Fuel purchasers should all be benefiting since the price of crude oil has a direct impact on gas and diesel fuel prices.
So what is causing the drop in crude oil prices? Supply and demand. Simply put, there has been a larger supply of crude oil in the marketplace than what has actually been required. Demand has been declining primarily due to a slowdown in world economies, with China as one specific example. In addition, continual improvements in fuel efficiency have helped lower demand.
At the same time, supply has been growing, particularly as the U.S. has worked its way toward energy independence. The U.S. is not completely there yet, but rapidly growing domestic shale oil production has provided abundant results. That additional supply has helped drive crude oil prices down over the past year.
Then, we experienced the most significant drop in crude oil this past week thanks to OPEC. Last Thursday, they announced that there would not be any reduction in their production quota for crude oil. Their members, including Saudi Arabia, Iran, Iraq and Venezuela just to name a few, decided that it was better to hold production levels steady rather than possibly allowing its nearly 40% market share to continue to erode. It’s an interesting strategy that may partially gamble on the price of crude oil becoming too low for some U.S. production to be profitable. As a result, those supply sources would ultimately be eliminated and the price of crude would start to rise again assuming demand remains consistent.
What will happen next is really just a guess. Most analysts believe crude oil prices will continue to fall, but there is no consensus on how low they will go. At this point, I haven’t seen any reports saying crude oil will be rise back to $80 a barrel by the end of December. Of course, that doesn’t mean it can’t happen… this is oil we are talking about. Unforeseen events like natural disasters and political turmoil can have a significant impact on the market. However, the more likely events that would drive demand back up to supply levels would be a very cold winter in the Northeast, Americans driving more because fuel prices are lower and world economies recovering with an increasing thirst for oil.
So, as they say, “What goes up must go down,” but I say, “When it comes to oil, what goes down must go up.” It’s just a matter of time.