By Ben Dickey The price of West Texas Intermediate (WTI) oil has fallen from over $100 per barrel in June to below $60- per-barrel as of December 20. History shows that big price declines are often followed by big rebounds and in a short period of time. In my opinion, that will happen again.
Demand still robust
Although we are currently producing a little more than we are consuming on a worldwide level, each year the level of oil production needs to be supplemented with new discoveries. Next year the world needs to find approximately 4.5 million bbl per day just to stay even with demand, according to my research. Any improvement in the world economy will increase the daily consumption. So new exploration cannot slow down, though a prolonged period of low prices will slow current exploration.
In my opinion, most OPEC members require much higher prices in order to support their economies. Their national budgets are dependent on higher prices for oil. Russia is also in dire straits at this price level. The Russian economy has slipped into a recession and needs foreign reserves to move the economy forward.
Winners and losers
But as the saying goes, "For every action there is a reaction." Even though some marginal producers will be hurt, the large reduction in the price of refined products is a huge positive to consumers. There are other positive factors as well related to the world economy. Central Banks around the world are adding stimulus into their economies. China surprised the markets by reducing its benchmark lending rate for the first time in over two years. Mario Draghi spoke of future increases in liquidity by the European Central Bank. The Bank of Japan also increased their bond purchases.