Written by Shiva Hari Subedi
The crude oil price was around $110 per barrel from 2010 until mid of 2014 but now oil is currently trading around $36 per barrel. Just few weeks ago, it even fell below $30 per barrel and was trading around $27 per barrel as a result of Saudi Arabia’s strategy to protect their market share by eliminating Non-OPEC oil producers which have high cost of production and by weak demand in many countries. Moreover, there is slowdown in China. Recently, International Sanctions over Iran’s nuclear program were lifted and the Iranian government began supplying oil in the market.
China is the second biggest economy, the largest oil importer and biggest energy consumer in the world. In 2015, the China’s growth slowed to its lowest in 25 years and its debts keep on rising, with its economy growing at 6.8 percent in the fourth quarter of 2015. There is manufacturing recession in China. For February 2016, the China’s official manufacturing Purchasing Managers’ Index (PMI) came at 49.0; below forecasts for 49.3 and January’s reading was 49.4. The PMI number below 50 means that there is fall in manufacturing activities in the country and above 50 represents means expansion in manufacturing activities. In the past, the Chinese economy was based on the manufacturing industry but now manufacturing makes about 40 percent of their gross domestic product (GDP) and the service sector contributed to about 50.5 percent of the GDP in 2015. Right now, the China is in a transitional period. It is shifting from manufacturing based industry to service based industry. These ongoing slow down, debts and recession problems have a direct negative impact on oil demand, therefore it helps to keep oil price lower. It’s all about supply and demand that is driving oil price in the market.
OPEC (Organization of the Petroleum Exporting Countries) produce about 40 percent of the world’s crude oil and OPEC’s oil exports represent about 60 percent of the total petroleum traded internationally. Saudi Arabia is the largest oil exporter in the world and second biggest oil producer. Saudi Arabia has been over-supplying the oil market in order to decrease the price and the low oil price has hit non-OPEC producers, such as those of US shale, harder. Now the US oil rig count is down nearly 75 percent from its peak of 1,609 in October 2014 before oil prices start falling. Baker Hughes data shows that the number of rigs drilling for oil in the US dropped by 26 in the third week of Feb 2016, leaving just 413 rigs active. It is expected that US rig count will continue to fall until mid of 2016 due to the low oil price which is currently trading at above $35 per barrel. US oil producers have been suffering hard due to low oil prices and in January and February of 2016, drillers have mothballed 123 oil rigs. This US rig count is at the lowest level since April 30, 1990 when there were 494 active rigs.
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