Just this summer, oil prices were above the $100 per barrel range. But in less than six months, the global price of oil has cratered from a 52-week high of $102.53 to a 52-week low of $62.72 per barrel. And now $50 oil is coming.
What’s wrong with that, right? Oil prices are at their lowest levels in five years, which means more money in the pockets of American consumers. (And conveniently just in time for the holidays, might I add!)
With prices at the pump currently a rock-bottom $2.77 per gallon nationwide, it’s admittedly easy to root for further price declines. And price of oil and gas should continue to fall in the near-term, for a number of reasons.
Oil Price Pressure #1: OPEC
OPEC, or the Organisation of the Petroleum Exporting Countries, has historically been able to wield enormous pricing power on energy prices worldwide. Consisting of a dozen member states that produce a vast majority of the world’s oil, OPEC is the best real-world example of an economic cartel.
The world was taken by surprise last week when OPEC said it wouldn’t cut production targets despite a global oil glut, and prices fell swiftly in response to the news. OPEC, while it acts as one entity for the economic benefits that result from price collusion and supply control, faced internal dissent from some member countries who desperately want to see oil prices rise.
Venezuela and Nigeria, for example, allegedly require prices near $100 a barrel to meet budgetary obligations, while Iran wants to see higher oil prices desperately as it suffers from sanctions.
So what, then, was OPEC’s motivation in keeping production constant and essentially driving prices lower? Ruining the economics of a competing oil producer is the most likely answer…
Oil Price Pressure #2: Domestic Producers
That’s right. America’s energy production capabilities have caught the attention of the globe. Specifically, our newfound focus on shale oil and hydraulic fracturing as a means of extraction shows great production potential and dramatically reduces America’s reliance on foreign oil.
In fact, OPEC’s decision not to cut back production in an effort to raise oil prices confirms just how seriously the cartel is taking the emergence of American shale. Some think OPEC is trying to drive oil prices below $60 per barrel, where shale becomes economically unattractive for frackers.
There may be some truth to the $60 level, but with four other strong forces at play pressuring oil prices, don’t be surprised if a barrel of oil hits the $50 per barrel price soon.
Oil Price Pressure #3: China’s Economy
China, the world’s second largest economy next to our own, is probably most well-known as a manufacturer and exporter. But in becoming the world’s premier exporter, China has grown to become an economic force in its own right, morphing into a resource-hungry nation of billions.
While energy producers welcome this influx of demand, China’s economy has been showing signs of weakness. Marketwatch.com noted that two gauges of China’s factory activity hinted at an underlying economic weakness in November:
“China’s official measure of manufacturing activity slipped to its lowest showing since March while a private gauge compiled by HSBC and research firm Markit touched a six-month low, according to data released Monday.”
So not only is there a supply glut, but there’s some reason to believe global demand will weaken as well if China can’t maintain expected levels of growth.
Oil Price Pressure #4: Europe’s Economy
Let’s not forget about Europe and its undeniably troubled economy. Two of the more stable countries in the eurozone, France and Germany, are struggling with economic problems of their own as the eurozone flirts with contraction.
InvestorPlace Blue Chip Growth Editor Louis Navellier thinks stimulus efforts the European Central Bank has taken in light of the continent’s tepid growth could encourage Europeans to start buying up greenbacks:
“The ECB has pumped so much money into its banking system that its member banks are fleeing to the U.S. in search of a stronger currency and higher real interest rates. In turn, this is undermining our Federal Reserve’s ability to manipulate interest rates. Plus, this ‘euro glut’ is now squelching interest rates globally and raising the risk of deflation in countries with strong currencies, like the U.S.”
And you know what happens to the price of oil when the U.S. dollar strengthens. Anyone up for $2 gallons of gas?
Oil Price Pressure #5: Strong U.S. Dollar
Another factor that could send oil tumbling to $50 per barrel levels is the strength of the greenback. The U.S. dollar has been in a secular rally since May, and is up about 12% against the euro in that time.
Since the price of oil is figured in USD, a stronger dollar means — all else constant — lower oil prices. In a post-quantitative easing America where economic growth is normalizing and the unemployment rate falling, continued strength in the greenback could pressure oil prices lower.
Of course, if you’re not so sure about the other reasons for cheaper oil but you’re bullish on the dollar, InvestorPlace contributor Dan Burrows has written about 3 Trades to Play a Stronger U.S. Dollar.
John Divine is an Assistant Editor at InvestorPlace. You can follow him on Twitter @divinebizkid.
