Taking oil’s temperature
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Jan 09, 2015  |  Vote 0    0

Taking oil’s temperature

What happens when the price of crude rises or falls?

OurWindsor.Ca

In the last six months, sharp declines in oil prices have pulled down stock values on Canada’s TSX and sent Russia’s economy into a tailspin. Crude prices fell again this week before stabilizing — but for how long?

The world pumped out an estimated 91.96 million barrels of oil per day in 2014, with the OPEC countries, Russia, and the United States leading the pack, according to estimates from the U.S. Energy Information Administration.

Prices for international benchmark Brent crude and its North American counterpart, known as West Texas Intermediate or WTI, are dictated by supply and demand — mostly.

Market sentiment is the other driving force — and it’s a powerful one. A sharp downturn in the world economy, such as 2008’s Great Recession, reduces the need for oil and can send prices plummeting. A sudden crisis in the Middle East, where most of the world’s oil is produced, can send the value of crude soaring.

“Predicting oil prices is challenging and humbling,” said Kip Beckman, principal research associate at the Conference Board of Canada. “If history is any guide, it shows that low prices are followed eventually by much higher prices because of the laws of supply and demand.”

After scraping $10 (U.S.) per barrel in the late 1990s, prices rose through the $50 mark by the mid-2000s and then took off. They peaked above $140 just before the Great Recession and then came crashing down, starting the cycle again.

Prices were above $100 per barrel when the latest decline began in mid-2014, prompted by declining forecasts for global growth. When OPEC declined to cut production in mid-November, the slump in prices turned into a slide.

“We’re expecting $60 by the end of this year,” Beckman said. “That may be a bit optimistic now. They should start to come back, but we’re not looking at $100 oil any time soon.”

Currently, the world is producing about 1 million barrels per day in excess of what it consumes, Beckman said. However, the world economy is expected to grow faster in 2015 than in the previous year as the U.S. gets back on its feet. But that could change if oil prices fall too sharply, cutting into global growth.

“Our base case was that oil prices would stop sliding at $55,” Beckman said. “We’ll just have to see how the year unfolds.”

So what does a barrel of oil’s price mean to the world? A few highlights:

$200 per barrel

2008, Former CIBC World Markets economist Jeff Rubin famously — or infamously — predicted that oil prices would hit these heady heights by 2012. He made the forecast based on the idea that short supplies would bump up against higher global demand and that drastically higher prices would be needed to make costly extraction viable. But with the Great Recession bearing down, oil did an about-face.

$147 per barrel

That was the price for WTI, also known as U.S. light sweet crude, at its most recent peak, reached on July 11, 2008, just as the U.S. housing market exploded due to faulty subprime mortgages and the world tipped into recession. Sharply diminished demand for oil sent prices through the floor.

$120 per barrel

Nigeria, which is Africa’s biggest oil producer, as well as Algeria, and Venezuela need oil prices near this level to balance their budgets, according to separate reports recently issued by the International Monetary Fund and Deutsche Bank AG. Declining oil prices have dealt a serious blow to Venezuela in particular, which derives nearly 95 per cent of its export revenues from crude. The troubled country is believed to be in recession and has been gripped by violent protests and an annual inflation rate of more than 60 per cent.

$100 per barrel

Brent crude hit $115 per barrel and WTI oil futures touched $107 per barrel in June, 2014, and lost about half their value by the end of the year. Experts say the latest decline in oil prices is fueled by lagging demand in weak economies in Asia and Europe, as well as a strong increase in U.S. production. By late December, Saudi Arabia’s oil minister declared in an interview with Middle East Economic Survey that $100 per barrel oil may be a thing of the past.

$80 per barrel

Approximately one in four new oil projects in Canada could be under threat if oil prices fall below this threshold for an extended time, according to a report by the International Energy Agency, issued in October. That compares to just four per cent of U.S. shale projects that would be affected. Saudi Arabia’s 2015 budget assumes oil prices at $80 per barrel, Bloomberg reported in December. That’s far above the $4 to $6 per barrel it costs the country to extract it.

$70 per barrel

An average oil price of $70 per barrel would cost Ottawa about $5 billion in lost revenues, CIBC World Markets noted in a December report. Provincial governments would lose another $5 billion to $8 billion. The lost revenue comes from slower economic growth that results as businesses in the oil sector cut capital spending. On the flip side, oil at this level would provide Canadians with the equivalent of a $10 billion boost to incomes.

$60 per barrel

When oil prices sank below this level in mid-December, it was their lowest point in five-and-a-half years. The drop also pulled the Canadian dollar below 87 cents (U.S.). The biggest impact was in Russia, which counts on oil and energy sales for half its government revenue. The central bank hiked a key interest rate to 17 per cent in a bid to prop up the ruble, which had fallen by 10 per cent.

$50 a barrel

WTI prices sank through the $50 range early this month. Canada’s GDP could sink to as low as 1.9 per cent (from the previous forecast of 2.4 per cent) if WTI prices remain at this level through 2015, according to a BofA Merrill Lynch research report released this week. Prices could average as low as $53 per barrel in 2015, Morgan Stanley says, revising its latest forecast down from $98.

$40 a barrel

When oil prices reach this level, negatives start to outweigh the positives in the world economy, according to a mid-December report by Julian Jessop of Capital Economics. “One risk is that lower oil prices could tip heavily indebted economies with already poor growth prospects over the edge,” he wrote. “We already think it likely that eurozone inflation will turn negative in the coming months, and $40 oil would pretty much guarantee that result.” Jessop also warned that oil-producing nations that depend on high prices could face “growing social unrest.”

$32 per barrel

From July to December, 2008, prices fell from a peak of $147 to $32 per barrel. That was its lowest level in five years.

$10 per barrel

In the late 1990s, oil prices plummeted to this level in the wake of the Asian financial crisis. The collapse of Thailand’s bhat led to sinking currencies and stocks and a loss of confidence across the region. The spot price for Brent crude declined to $9.45 per barrel in December, 1998.

$5 per barrel

In March, 1999, The Economist warned that the world may be headed for single-digit oil prices. “Thanks to new technology and productivity gains, you might expect the price of oil, like that of most commodities, to fall slowly over the years,” the magazine wrote. “Judging by the oil market in the pre-OPEC era, a ‘normal’ market price might now be in the $5 to $10 range. Factor in the current slow growth of the world economy and the normal price drops to the bottom of that range.”

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