There have been four major modern oil price collapses: 1986, 1998, 2008, and the most recent in 2014. Most market watchers agree that prices will fall in January 2018, but could we be on the cusp of another collapse? To spot the signs we need to go back to June 2014.
Between 2000 and 2008, oil prices saw an unprecedented spike, rising from under $25 per barrel to almost $150 per barrel. But prices then remained relatively stable until early 2014 when production began to increase at a dangerous rate.
One of the main drivers was fracking, which came of age that year. U.S. production to rise roughly 45%, and in the year to June, U.S. producers saw the largest volume increase since records began in 1900. Canadian production also rose 25% thanks to technological advances and higher pipeline throughput.
Together, Canada and the U.S. produced some five million more barrels each day than they did in 2010, and North American oil production grew 38% faster than total global demand. Meanwhile, Saudi Arabia, the biggest oil producer within OPEC, maintained their production at historically high levels.
In June 2014, prices began to fall, rapidly. The unusual surge in production, the unwillingness to throttle back and weaker than expected demand – especially from emerging nations including China and India – saw oil prices fall more than 40% in the back half of the year, bumping down to around $60 per barrel.
But are we heading this way again?
U.S. oil production has soared 16% since mid-2016 to 9.78 million barrels per day and in October U.S. crude exports rose to a record 2 million barrels per day. This means U.S. supply is now close to matching the levels of top producers Russia and Saudi Arabia, and, according to the International Energy Agency (IEA), will likely move oil markets into a supply surplus in the first half of 2018.
However, compliance with production cuts on the back of the most recent OPEC/non-OPEC producers' agreement is holding across the board, but there is a risk that compliance may drop especially for Iraq or Russia. If that happens then Saudi Arabia may well, as in 2014, opt to let prices fall.
But while OPEC and others have cut production, U.S. shale producers have not.
According to the IEA, crude production from shale is set to grow by 94,000 barrels a day in January, and U.S. oil output in 2018 will average 10 million barrels a day, compared with 9.2 million barrels a day this year. Total output from shale regions will top out at 6.4 million barrels a day next month, up more than 1 million barrels a day from January 2017. That would mark the highest annual average production on record.
In Europe, the Forties pipeline is set to comes back online and the likes of Rosneft show no signs of throttling back their ambitions. But the most worrying sign for prices must be the growing signs of a recession in overheated emerging economies such as China and also innovation in green technology. Chinese corporate debt is rising rapidly, almost doubling since 2007. It now stands at 166% GDP, and household debt rose 44% last year. Couple this with new protectionist policies in the U.S., overheated markets including the Bitcoin bubble, and we have a very dangerous situation indeed.
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