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Sluggish Oil Prices Driven by Low Demand and High Supply

September 18th, 2014

Brent crude, one of the benchmarks of global oil prices, fell to its lowest closing price in more than two years, bringing the price to $92.80 a barrel on Sept. 16.

 

The drop in price comes as a result of low demand and an abundant supply across the globe. The International Energy Agency (IEA) came out with a statement on Thursday, Sept. 11, stating that the prices have been “weighted down by abundant supplies and further indications of slow global economic and oil-demand growth.”

 

This statement also came with a cut in the oil demand forecasts for the next two years, due to a large slowdown in production.  According to the Wall Street Journal, “The falling prices and growing contago–a market condition in which prices of oil for immediate delivery are lower than those for further-out months–is turning investors bearish.

 

Meanwhile, oil production in the United States grew to its highest level since 1986 according to the Energy Information Administration. Saudi Arabia, the most prominent member of OPEC, or the Organization of Petroleum Exporting Countries, has cut its production last month stating that the cut in production was directly tied to lower exports to the big Asian markets, chiefly China. According to the People’s Bank of China (which acts similarly to the U.S. Federal Reserve), Chinese industrial demand has fallen to the lowest level since the global financial crisis in 2008.

 

According to Bloomberg, “the conflict in Iraq, the second-biggest OPEC producer, has spared oil facilities in the south, home to about three-quarters of its crude output.”

 

Some industry analysts, such as Francisco Blauch of Bank of America’s commodities division, say that OPEC has a vested interest in allowing Brent crude futures to drop to at or below $85 a barrel, which would stem U.S. shale production, which has decreased demand for U.S. oil imports.

 

Editor’s Note: Information from The Wall Street Journal and Bloomberg News was used in this article.