Global energy markets are under major pressure from both sides of the supply-demand equation. Supply-side factors include a glut in global stockpiles and OPEC’s decision last month not to shore up falling prices by restricting output. The OPEC announcement – one that was far from unanimous among members of the organization – sent prices into a free-fall. WTI crude has lost around $10 in value since late November, and at time of writing it has slipped to around $54 per barrel. US markets followed in tow, as the Dow Jones Industrial Average recorded its biggest drop in three years and the VIX (Chicago Board Options Exchange Volatility Index) spiked 78% over the past trading week.
The sustained and seemingly unending plummet in oil prices is not strictly a supply-side phenomenon. Jitters over the short-term health of major economies such as Japan and the European Union are fueling speculation that global demand will wane, driving stockpiles up even further.
Impact
How Low Can It Go?
Similar to the volatile yet ultimately short-lived swings that have hiccupped the years-long bull market in the United States, the severity of the current dip in energy prices seems driven by fear as much as fact. In other words, there’s an expectation that once we see a stabilization that holds for a few days, oil prices will make a modest upward recovery that better reflects the fundamentals of global supply and demand. Some analysts have put this stabilization point at the $55-$65 range; a relatively low figure given that WTI oil was trading at around $107 in June, though one reflecting the new normal of increased supply and diminished demand.
Some yet think the worst is yet to come, and that oil prices are headed far into the sub-$50 range. This group points to comments from UAE Energy Minister Suhail Al-Mazrouei, who recently said OPEC was willing to let prices drop under $40. Even more importantly, Al-Mazrouei claimed that OPEC would wait at least three months before considering an emergency meeting to scale back output quotas.
