Despite the relative stability in the international price of crude oil in recent times, oil exporting countries’ revenue will not break even soon, as the commodity’s prices will continue to face headwinds.
At the weekend, the International Monetary Fund (IMF) Global Economy Forum, noted that the price of the commodity will not return to the high levels that preceded their historic collapse two years ago.
IMF report noted that oil production will still exceed consumption for the foreseeable future. The report identified 3 reasons for this.
1. Shale oil
According to it, shale oil production has permanently added to supply at lower prices, while demand will be curtailed by slower growth in emerging markets and global efforts to cut down on carbon emissions.
The report said: “it all adds up to a ‘new normal’ for oil.”
“Shale has been a game changer. Unexpectedly strong shale-oil production of five million barrels per day contributed to the global supply glut. That, along with the surprising decision by the Organization of the Petroleum Exporting Countries (OPEC) to keep production unchanged, contributed to the oil price collapse that started in June 2014.
“Although the price collapse led to a massive cut in oil investments, production was slow to respond, keeping supply in excess. Shale drillers have significantly cut costs by improving efficiency, allowing major players to avoid bankruptcy,” the reported noted.
2. Dollar rate
It also pointed out that there is uncertainty regarding supply, especially regarding the cost associated with extraction, as well as production from so-called shale “fracklog”- drilled but uncompleted wells.
3. Low price patronage
The global institution said that a sizable share of oil demand is attributable to the price drop rather than income gains, hence with limited scope for further declines in prices in dollar terms, increases in oil demand will depend largely on prospects for global economic growth.