The Uncertain Future Direction of Oil Prices

Since last year, prices of oil have decreased by over fifty percent and have festered at some of their lowest rates in many years. This has occurred due to several factors, including decreasing global demand for oil and an increasing supply. Lately, however, demand for crude oil is on the rise and overall output has been growing in major oil-producing nations such as Saudi Arabia, Iraq, and Libya. It is yet to be seen if these events will continue as an industry trend for this year, but a potential change in oil prices could certainly occur.

Analysts of the current oil price situation have looked toward two countries as major drivers of price trends: the United States and Saudi Arabia. The U.S. is currently at a peak in oil production, but is expected to decline in production levels as the year progresses. The monumental oil output and storage capacity from the United States was said to be the main reason that crude oil prices dropped so low. Now, companies in the U.S. are starting to scale back on their production rates, and Saudi Arabia is stepping back in the picture. Oil production in Saudi Arabia has hit its highest level in over thirty years, and the country is starting to increase its international business and push out U.S. competitors. The increase is so drastic because Saudi Arabia is making use of its spare capacity, and OPEC is also producing above its quota. The strategy is working for business, as it has already helped to decrease U.S. shale production.

Saudi Arabia increasing its oil production rates has so far seemed to keep oil prices low, but there are two more factors which may make prices rebound: OPEC's spare capacity and increasing global demand. As Saudi Arabia increases its production rates, it is using up its reserves at an equally enormous rate. As a result, the oil market may tighten when its biggest global supplier starts to use up the bottom of its reserves. It is possible that Saudi Arabia may not reach this rate, but global demand for oil is also becoming much larger. The International Energy Agency has predicted that oil demand will increase by millions of barrels per day, especially in Europe and Southeast Asia. In fact, Saudi Arabia has already had to raise prices of the crude oil that it sells in Asia. While this increased demand and consumption of oil is already expected to raise prices, it will especially have a major effect if Saudi Arabia keeps producing at the rate that it is currently going at. If global demand does surpass the amount of oil Saudi Arabia and OPEC have in their spare capacities, then it will lead to trouble in these regions and a tightening of the oil market, making oil prices skyrocket.

Oil prices in the future will depend on how the United States handles future production, how Saudi Arabia decides to use its reserves, and which direction global demand for oil goes.