History of Crude Oil Brent Price

PART A

History of Crude Oil Brent Price

Brent Crude serves as a benchmark price for purchases of oil worldwide. Back in June 2014, price of Brent Crude Oil was about $115/barrel and as of January 2015, the price of it has reached to its lowest value over six years at $44.38/barrel (OPEC 2015). The reduction of oil price was mostly due to observable reducing demand from China and obvious supply shocks of Brent Crude Oil which creates a powerful shock to the oil pricing, causing the price to drop ever since September 2014.

For the following discussion, we will be addressing the major factors affecting the price of Brent Crude Oil and also predicting whether it will be above or below the current “spot” price of approximately US$60/barrel in terms of short term which has a span of a year as well as long term, in 5 years’ time.

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Source:  Nasdaq 2015

1.1 Short term factors affecting price of Brent Crude Oil

1. United States Currency & Production

The oil market continued to go under pressure by several other bearish factors which caused the prices of Brent Crude Oil to be pushed down further, which includes strengthening of US dollar. Since oil is priced under US dollar, it would be obvious that strengthening of US dollar would mean less affordable for buyers to purchase oil in foreign currency (Reuters 2015).

Oil production throughout US has substantially decreased over the region except for Texas and North Dakota where the main growth of Crude oil comes from. The reduction towards the Crude oil production reflects that the number of operating rigs drilling for oil in the US has fallen to 679, the lowest level since September 2010. The falling numbers of oil rigs will only means that the U.S oil production would decline by 57000 barrels a day (see appendix 1) and soon the American Output would be flatten out and thus, would have a negative impact the production of Crude oil (EIA 2015). If the current oil prices continue to have its downward trend, operating rigs drilling will have low margins to drill, with the current oil price, it would be below its production cost and this would cause some oil producing companies such as Marathon Oil Corporation (WSJ 2015) to stop their operations due to the fact that they have higher operating cost working in some of the unconventional shale oil markets. With falling rig counts, this will indicate that oil producing companies are concerned about the negative impact that will give a downslide to the oil prices that are expected to be low (WSJ 2015). This has led to companies slashing costs deeper and faster as well as reducing their overall capital spending budgets to cope with the tumbling Brent Crude Oil prices to compete with their competitors. But even if the growth in US oil production decreased, it might not be enough to bring the world’s oil supply to meet its demand by OPEC pumping hard on oil.