Oil Prices on the Way Down

By Ryan Boyle

Oil prices are notoriously difficult to forecast. Production can be volatile, and the global oil supply chain is complex. Unexpected price swings can cause pain to businesses and households; pledges from elected leaders to bring down prices often prove to be out of reach. But for the year ahead, a simple combination of falling demand and rising supply are poised to keep oil prices in check.

Everywhere we look, the supply of oil is on the rise. U.S. production rose gradually for years and is still holding near all-time highs. Shale producers have become more efficient, extracting as much crude as possible from existing wells. The nation has become nearly self-sufficient in its energy needs; from a trivial export volume ten years ago, the nation now exports about four million barrels per day (bpd).

Most members of the Organization of Petroleum Exporting Countries (OPEC) are also expanding their production. In recent years, OPEC nations had voluntarily reduced their output by 2.2 million bpd, hoping to preserve a more profitable price point. Those reductions are now being unwound, despite low prices; OPEC nations are seeking to recapture their market share. And conflict in the Middle East did not disrupt supply.

Oil from Russia has become a point of contention; many of the world's major buyers did not follow western sanctions. The U.S. raised tariff rates on India to discourage its purchases of Russian oil and has threatened the same for other nations. Though its export markets are under pressure, Russia is unlikely to halt, as crude oil represents over 20% of the country's exports.

Meanwhile, the global economy has stepped down. China is reckoning with overproduction in its manufacturing sector and sharply cooler demand from its largest trading partner, which slows their oil consumption. China has continued to purchase oil despite the slowdown, potentially restocking their reserves. No other nation stands ready to fill the gap created by China's lower demand.

Industry bodies are watching these shifting dynamics. The US Energy Information Administration (EIA) sees 2.3 million bpd in new global supply outpacing 900,000 bpd in demand growth for the remainder of the year. The International Energy Agency (IEA) forecasts an even larger increase of 2.7 million bpd in new supply, met with even less demand than the EIA predicts.