There was a time when crude oil was trading at close to $145 a barrel, just four short years ago. This was a time when there was a lot of political unrest in the Middle East, with several countries embroiled in the Arab Spring. Crude oil had been as low as $40 a barrel in 2009 as the world was still reeling from the effects of the global financial crisis of 2008. But when civil war broke out in Libya and shuttered its oil production, crude oil prices shot up and hot highs that had not been seen for a long time. However, by 2014, things began to change. In furtherance of President Barack Obama’s campaign promise to start looking for alternative sources of crude oil so as to wean America off its supplies from volatile regions, the deployment of new shale technology for crude oil extraction kicked off in the US.
By the end of 2014, crude oil production in the US had risen to about 9 million barrels per day. This was the catalyst for a 60% drop in crude oil prices from late 2014 till date. An attempt was made to shore up oil prices by OPEC in one of its regular meetings earlier in the year. However, the Saudis refused to assent to production cuts, bolstered by its extremely large foreign exchange reserves which have given it the ability to withstand the price shocks. Iran has also had its sanctions eased, opening the door for it to sell crude oil once more.
With increased supply and reduction in global demand, crude oil prices have attained their 2009 lows and prices have been stuck around $40 since August 2015. So the question now is, how will global markets be impacted by these events?
Impact on World Markets
The impact on crude oil prices is already being felt as a state of glut now persists in the market. Unlike on previous occasions, nobody really knows how low oil prices will go, or how long they will stay at present levels. But one thing that industry watchers seem to have a consensus on is that the days of triple digit oil prices may not be seen for a very long time. This can be attributed to the fact that the fundamentals this time, are more permanent. Shale oil production is here to stay and as the world pushes for a move away from fossil fuels, it is hard to see demand increasing rapidly to drive prices up.
Faced with dwindling oil revenues, many economies who depend on this commodity will suffer in the short to medium term. OPEC members Nigeria and Venezuela are already seeing the effects of dwindling oil revenues. Many states in Nigeria are owing workers months in salary arrears. Venezuela’s economy is virtually on its knees. Russia is now resorting to the sale of military hardware to compensate for a drop in oil revenue and recently hosted a military show which attracted potential buyers from all over the world.
Commodity currencies are also taking a hit. The Canadian Dollar has lost more than 2,400 points against the US Dollar since June 2014. Other emerging market currencies have also lost ground against the greenback.
However, the market volatility is creating opportunities for traders who can get around the choppy movements and plot trades that can ride the waves of volatility. Opportunities abound in trading commodities as well as currencies and stocks which are tied to the crude oil asset.