Crude Oil Price Drivers | Russell T. Rudy Energy LLC
In today’s current and volatile market it is tempting to get caught up in daily price fluctuations and the reasons for short term swings. For a capital intensive industry such as energy, with long lead times from prospect generation to actual hydrocarbon sale, it is beneficial to step back and take a look at strategic factors which can affect prices. A recent study by Morgan Stanley Research offers an excellent summary of these factors and their potential influence on future crude prices:
Service Costs-The drilling slowdown, reduced demand for completion services etc., and forced innovation by operators, will all act to drives these costs down. However, they are cyclical and will rise as demand increases when prices recover.
Strength of the U. S. Dollar-A stronger dollar means that it takes fewer of them to buy a barrel of oil which in turn exerts downward pressure on prices. However, currency fluctuations can exacerbate crude price volatility. This in turn makes projects riskier and consequently, they will demand higher rates of return for operators to pursue them. This could ultimately suppress global supply and increase crude prices.
Production Growth-As global production increases, there will be continued downward pressure on oil prices. However, there is little spare capacity currently and outages/shortages could lead to price spikes.
Global Inventory Overhang-Excess crude inventories in storage can delay price recovery as this oil is released into the global market. However, this is a relatively short term phenomenon and long term, new international projects are needed to insure adequate future supplies.
International Competition-As prices fall some nations might feel that their only way to maintain revenues is to produce more crude. This in turn floods the market, driving prices even further down. However, the U. S. crude export ban could prevent excess domestic light crudes from entering the global market, thereby artificially restricting global supply and helping stabilize prices.
Geopolitics-Removing the sanction on Iran, and political stabilization in Libya could result in incremental production which will add to global supply and depress prices. Conversely, civil unrest in Nigeria and Venezuela could reduce production and exert upward pressure on prices.
Conclusion– No one can predict the future with certainty, and price movements are the net effect of a number of diverse factors which often move in different directions. However, by identifying and monitoring these drivers, we can make informed decisions as to where prices might be headed.
