As the price of oil continues to decline into the fourth quarter of 2015, people are starting to wonder exactly how low it can go? The global market is bracing itself for the millions of barrels of oil from Iran that expected to come online after Tehran reaches its nuclear deal agreement with the US and other global powers. The nuclear agreement will lift some of the sanctions on Iran’s crude oil exports which will add to the oil supply glut that is globally holding prices down.
How Low is Oil Going?
Some analysts believe that oil will go even lower into the $30 range. This will be necessary, they say, in order to flush out the less efficient shale producers, which will reduce supply and ultimately start increasing the price of oil. Unfortunately right now, because of the prolonged stagnant low oil prices, oil producers are producing as much oil as possible in order to make up for the lower revenue they’re getting per barrel. This of course releases even more oil onto the open market as producers try to bolster profits by selling as much as they can.
More Global Oil Supply
The United States, Saudi Arabia and even Russia and Iraq have all begun pumping as much oil as they can seemingly at the same time. What’s been surprising is that the US oil industry has thrived even with oil prices at around $40 a barrel, with Saudi Arabia also increasing their production despite the falling oil prices. Because oil prices are so low, oil producers are trying to produce as much as possible in order to make up for the price shortfall. The United States producers have stayed the course and have deftly lowered the cost of oil production while meeting production targets. The real losers are countries that haven’t been able to keep up with the global competition, countries like Venezuela and Egypt (which has cut domestic fuel subsidies in the face of falling oil exports).
As of late August 2015, the official US oil rig count is at 674. That’s down almost 60% from its peak of 1609 in October 2014. A fundamental economic problem is facing oil producers and investors: the further that oil prices drop, the longer it’s going to take for oil to climb back to its previous price levels. As the oil price falls below $40 a barrel, is going to be an uphill struggle to get the price back to $60 a barrel before the end of 2016.