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Supply Glut Threatens To Push Oil Prices Below $40 Per Barrel

The price of crude oil has fallen by more than 20 percent in just over a month. How much lower can it go?

Jamie Webster, senior director of global oil markets at IHS, estimates the demand for oil is now more than twice what it was a year ago. But it’s still nowhere near enough to absorb what’s being pumped out of the ground.

“You’ve got an oversupply of, over the last several quarters, it’s, you know, one-and-a-half million barrels a day or so,” Webster says, “and for the last several months, we’ve been shoving it into storage, but that is increasingly looking more full in various places.” That worldwide glut is why oil prices are falling in the middle of the summer driving season, down more than 20 percent since the end of June.

Those prices can’t fall indefinitely. Companies won’t drill if oil costs more to produce than it will sell for. But that floor has dropped over the past year.

“The breakeven price in 2014 was around $60, now you’re looking at, it’s actually in the upper $40s,” Webster says.

Part of the reason is that oil companies have become a lot more selective about where they drill, steering clear of regions where they don’t expect to find much crude. They’ve also been demanding, and getting, steep discounts from service providers.

“The market power in terms of who’s wielding the big stick has shifted and shifted in a big hurry,” says Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers. “A year ago, the providers of those services could almost charge about what they wanted to in terms of drilling rigs, in terms of provision of services, and even in terms of labor. Well that has now changed, of course.”

The result is that oil may have to fall to $40 a barrel, or even into the $30s, before prices finally bottom out and start rising again.

 

IHS- Crude oil prices poised to drop further

 

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Andrew Schneider

Politics and Government Reporter

Andrew heads Houston Public Media’s coverage of national, state, and local elections. He also reports on major policy issues before the Texas Legislature and county and city governments across Greater Houston. Before taking up his current post, Andrew spent five years as Houston Public Media’s business reporter, covering the oil...

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