Crude oil slump, biggest in over 10 years

There seems to be no relief for the falling price of crude oil, which has been experiencing its sharpest slump for 11 years. The brent crude oil stock price dropped to its lowest price this week, to just over $36 (£24) per barrel. This price is lower than the depths oil experienced during the financial crisis, reports the Financial Times. 

Part of the difficulty seems to be due to overproduction of crude oil across the globe, which is building an overly saturated market. Demand has been strong this year, as oil stocks in the developed world have expanded to almost 3 billion barrels, according to the International Energy Agency. This equates to more than a month of global oil supplies.

However, demand is expected to shrink in 2016 following the swift pace of the market this year. The surplus stock that is piling up is driving the price of oil down, and there is a worry that stock prices could fall to below $20 per barrel. 

For 18 months now, the output of crude oil has substantially exceeded the targets set. The global supply has constantly stayed in excess of demand, with the gap expected to grow as demand drops. If inventories continue to grow at the current rate, 2016 will see a huge excess of oil weighing on the market.

Iran, once the Organisation of the Petroleum Exporting Countries' (Opec's) second largest producer, is expected to increase its output by around one million barrels a day when sanctions linked to its nuclear programme are lifted. This will put even more pressure on the oil industry, which could see prices drop as much as between $5 and $15 a barrel, according to the Guardian.

"The hope for a rebalancing in 2016 continues to suffer serious setbacks," said Adam Longson, analyst at Morgan Stanley.

The effect of this is being seen globally, as Saudi Arabia, the United Arab Emirates and Kuwait all raise their interest rates in a bid to protect their currencies. Saudi Arabia and Iran have both resisted requests for restrained production. 

The slump in oil prices has, however, had a positive effect elsewhere. The International Monetary Fund has estimated that the falling prices will cause a boost of 0.3 per cent to the global economy. This is due to the net effect of higher consumer spending as a result of fuel and energy bills falling, minus the drag of job losses and reduced investment.

Unfortunately, the low oil prices worldwide are undermining arguments made at the Paris climate change summit earlier this month, according to the Los Angeles Times's Steve Yetiv, and sustained low prices could complicate the global transition to a low-carbon economy."Burning fossil fuels is an increasingly costly habit. If prices remain low for too long, it will hurt efforts to address climate change, especially in the US, where citizens largely oppose raising oil taxes," he said. 

So far, the rise of interest rates and continued production in Saudi Arabia has been successful for the nation, and there is evidence that the strategy could continue to work. As the prices continue to drop, companies are reacting by making spending and drilling cuts. 

This rebalance could see an improvement in the industry, according to OilPrice.com. A sharp decrease in investment and production could be the catalyst for a sustained and fairly rapid recovery to the industry. 

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