The Collapse of Oil Prices 2016

So, what has caused oil to fall this severely in the first place?

The excessive supply of oil has likely been the main reason for the big drop in its price. The glut first started to build in the US because of the shale revolution there. Companies sold their oil cheaper, causing the Organization of Petroleum Exporting Countries (OPEC) to lose market share. Traditionally, the OPEC had acted as a swing producer; it would cut its oil supply if prices fell sharply and increase production if prices rose meaningfully, as it attempted to keep oil relatively stable at a comfortable level. This strategy had served the oil cartel well in the past – especially its largest member, Saudi Arabia. However, with shale oil booming, the OPEC could no longer control the market like before. If the cartel cut its oil output, the US and other shale producers would simply fill the void and increase their market share by selling oil cheaper. Therefore, in November 2014, Saudi Arabia resisted calls from poorer members of the OPEC and decided to keep the cartel’s production target unchanged, knowing full well that the market was already oversupplied. It effectively waged war on shale oil producers in an attempt to drive them out of business.
However, this strategy backfired as oil prices fell significantly farther and remained low much longer than what the Saudis and the OPEC had envisaged. Shale producers proved to be more resilient than initially thought. Although US oil production started to respond in the second half of 2015, the glut nevertheless grew – and not just in the US, but now across the globe. One of the other big worries for investors had been Iran’s full return to the oil market. In July 2015, an agreement was signed between Iran and six world powers to lift its nuclear-related economic sanctions if Tehran completed the steps needed to implement the deal. This deal came into effect in mid-January 2016 after the UN’s atomic agency confirmed it had verified that Iran has significantly reduced its nuclear infrastructure. As a result, Iran is now able to trade freely and can therefore export more oil. Crude’s immediate response to the news was another 5% drop at the open on Monday January 18, which saw Brent trade for a time below $28 a barrel. Although oil prices have since made back some of those losses, they remain entrenched in a well-established bear trend.