Oil Prices Fall as Global Supply Increases

Author: Jeff Nemesi

Published:

Oil prices fell 6.7% per barrel on November 27th after OPEC decided not to cut production. Currencies linked to oil such as the Canadian dollar and the Norwegian krone took a hit, as prices this low will cause many fracking companies to become unprofitable. Low cost producers in countries like Saudi Arabia will be able to sustain small profits at such low prices, but U.S. fracking companies are not profitable at a price under $70 per barrel. Falling oil prices are a positive sign for economies worldwide, since it acts like a tax cut for consumers. The current price weakness can be somewhat attributed to weak demand globally, but the rise of fracking worldwide leads us to believe that there might be an oversupply.

Analysts believe this is a shift in the pricing of oil, where Saudi Arabia and OPEC will no longer control the supply; rather it will be the market itself that sets prices. U.S. oil production has been driven to 9 million barrels a day, which marks the highest production level in 30 years. It is expected that it will grow even more next year as international markets begin to import U.S. oil. With prices as low as they are, it is expected that OPEC’s decision not to cut production will create a survival of the fittest competitive landscape, where the strongest companies will remain and the weaker companies will fade.

Today, Barclays became the first major Wall Street firm to upgrade a major oil stock since prices began to plunge. This shows that Wall Street might see a bottom to this price fall, and there might be some value in investing in these companies after most companies’ stocks were hit hard.  Where do you think oil prices will go from here? What steps should OPEC take to ensure that companies remain profitable?