It’s now called a ‘collapse’: The US benchmark light sweet crude plunged 4.6% to settle at $81.84 a barrel on Tuesday, the lowest since June 2012. In London, Brent made a similar journey to $85.04, its lowest level since November 2010. Explanations abound why this is suddenly happening, after years of deceptive calm.
Is it some harebrained plot to punish Russia by destroying its economy? Signs of success are everywhere. The ruble is in free fall despite the central bank’s efforts to prop it up. Yield on Russia’s 10-year note is nearly 10%. The government’s budget, heavily dependent on oil revenues, is in trouble. And every unit of foreign currency that isn’t nailed down is fleeing the country.
Or is it a plot by Saudi Arabia to squash the US shale oil boom? In November last year, the Saudi Gazette published an editorial on the ‘successful, wise, and balanced OPEC strategy’ that led to ‘unprecedented’ stability of oil prices for the past few years of around $106 a barrel. But couched in words such as ‘skeptics are demanding,’ it uttered the threat to raise OPEC production until the price would drop ‘below $70 a barrel’ to ‘remove the shale oil from the world oil production map….’
Or is it the combination of surging production in the US and sagging demand around the world, particularly in China and Europe?
Demand for oil would inch up this year at the slowest rate since the terrible year of 2009, the IEA predicted. OPEC might not be willing or able to lower production, it said. Why? Because of the US shale boom. And so, ‘Further oil price drops would likely be needed for supply to take a hit – or for demand growth to get a lift.’
This post was published at Wolf Street on October 15, 2014.
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