The oil market has rebounded following a sell-off, with crude prices now up to the highest level in nearly three weeks. Although Saudi Arabia has indicated it might stop its production cuts, which would help stabilize the market again, it hasn’t quite been enough to push prices back up yet.
Although oil prices have recovered slightly from last week’s lows, some analysts worry that higher crude supplies could put a limit on any further price hikes until demand for OPEC’s oil comes back up to speed.”
This article will go over how the global economy is beginning to recover following a sharp decline in oil and other commodities. It will also discuss how this is affecting the global market and how OPEC members are responding.
Global Economy
The global market experienced a lot of volatility on account of the decline in oil price and other major commodities as well. The decline in oil and commodities pushed down many economies around the world, causing them to slow down.
As a result, many economists are concerned that global economic growth is slowing down and may even fall into recession. Although there have been improvements, drought conditions have increased food prices, which have eaten away at households’ budgets and caused some governments to react with higher taxes on key goods.
In addition to this, weak demand for commodities has led to capacity cuts by various mining firms which has ultimately caused layoffs in the sector. Low prices in most of the sectors have also caused more than one third of workers in several countries to lose their jobs.
OPEC and Oil Market
OPEC is a collection of 14 oil-producing nations around the world. It was founded in 1960 and its main goal is to monitor the oil market and put measures in place that would stabilize it by reducing its production levels when needed. However, OPEC decided that it would cut production by about 1.2 million barrels a day for six months starting from January last year, which helped stabilize oil prices at around $50 per barrel since then.
This time, the organization has decided to reduce production by 1.2 million barrels a day for nine months starting from November 2015. This would reduce supply by about 400,000 to 500,000 barrels a day over the next nine months and that should help relieve some of the pressure on oil prices.
In addition to reducing production, OPEC also decided that it would maintain its current levels of around 30 million barrels a day of production which so far have helped stabilize oil price at around $50 per barrel. It is expected that this will be able to maintain oil prices until demand recovers because oil supply is not expected to catch up with demand until 2020 when demand for oil will again rise.
Oil market
Oil price has rebounded sharply following a sell-off that occurred last week. On Thursday, oil prices for the North Sea benchmark Brent fell to $37.15 per barrel down from $50 a week prior. However, on Friday the price rebounded slightly but was still considerably lower than the average of $39.76 per barrel from January through March of this year. Prices have now recovered and are at around $38.90 for Brent and just below $39 for U.S. crude West Texas Intermediate (WTI).
WTI crude oil has struggled to remain at or above $40 a barrel thus far this year. The U.S. Energy Information Agency (EIA) warns that if oil prices continue to drop, drilling activity in the U.S. shale market will likely decline later this year and that could push prices lower.
Market Impact:
The price of crude oil is one of the most important factors for the global economy because it’s the main energy source for about 80% of the world’s transport and it’s use by most manufacturing companies as well. An increase or decrease in crude oil price tends to impact the economy accordingly by either raising or lowering production and demand for goods around the world.
A sharp price rise in crude oil usually discourages investment in the production of oil and other related products as well as discourages consumption of them. On the other hand, a sharp fall in crude oil is usually met with a rapid recovery by firms because they will be able to sell their existing stocks of products at lower prices, thus increasing demand and boosting profits. While it’s not very significant on its own, it is important because it provides evidence that the global economy is beginning to recover.
