Oil drops below $45 per barrel amid scary scenarios

News of a faltering oil market have been all over the media for the past several weeks, and recent forecasts of further weakening for the black gold have weighed again on its price.

The International Energy Agency (IEA) released a report on Friday containing its views that the U.S. daily oil production could drop under 400,000 barrels for the first time since 1992. But given that OPEC countries will be looking to maintain their oil production at all time high volumes, it is likely that global oil production will not fall significantly. According to the IEA, lower crude oil prices are pushing for the market to decrease output in order to ignite more demand, but OPEC’s strategy – led by Saudi Arabia – to preserve market shares leads to inefficient production. U.S. oil producers have not yet slowed down on their production as initially expected. Experts say the reason for the lack of slowdown are technological advancements that allow them and their fracking wells to extract increasing volumes of oil with minimal additional costs. So even though oil prices have plunged, U.S. oil producers manage to remain profitable, and those wells that have been temporarily suspended might resume profitable extraction at any time. IEA expects that the low prices could drive demand to the highest level of the last five years.

Comments by Goldman Sachs also reaffirmed the oil suppliers’ stance of not slowing down on their oil production as expected. The investment banking firm also expressed its projections that crude oil production surplus will continue during next year and that OPEC could actually increase its production volume despite the decrease in demand. The report also mentioned an extreme scenario that the prices of crude oil could nosedive as low as $20 per barrel and storage spaces filling up. But their short-term forecasts for the price of crude oil one month from now have been reduced down to $38 per barrel, and at twelve months from now the price to remain at the same levels as now i.e. $45 per barrel.

Crude oil production in the U.S. has steeply increased over the past few years due to high prices and resulted in large profits. About one year ago crude oil’s price was as high as $90 per barrel but these days the rate has been halved. The discouraging comments by IEA as well as the downgraded forecasts by Goldman Sachs have reduced traders’ appetite for the black gold. On Friday the price of West Texas Intermediary (WTI) fell by 2.9% down to $44.63 per barrel, where the price of Brent Crude also dropped by 1.6% and ended last week’s trading at $48.14 per barrel.

Coming up this week is the U.S. interest rate decision, due on Thursday 17 September at 18:00 GMT, that could easily have an impact on the EUR/USD. While expectations for an interest rate increase this week are low, the Federal Reserve (Fed) might be on course to prepare the markets for the economic impact that could follow such decision if and when it happens in the future. Would it also increase the appetite of dollar bulls?

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