I have researched an article «$20 is the new $40», which discuss the changes in prices oo the oil market at the beginning of 2016 year. The energy, obtained from burning oil, is the main driving force of the economy today. Economic growth and oil prices move unidirectionally, and the slowdown in global economic growth is accompanied by a fall in world oil prices.
Oil supply in the world market depends on the demand for oil products and, accordingly, the factors that form the demand. At the same time, the volume of supply (production) on oil is affected by geological and technological factors reflecting the geological characteristics of developed and explored deposits, the state policy in oil-producing countries in the oil sector, the behavior of the oil companies - oil producers, and other unpredictable factors - accidents, natural disasters, acts of terrorism and war.
So, increasing of crude oil stocks to 1.3 billion barrels caused the increase in supply, and moving the supply curve to the right (S1). The policy of state in oil sector could also change the supply and move the supply curve. For example, the creation of favorable conditions for investments and competitiveness for oil producers through tax mechanism will increase the supply etc. Analysis of supply on the world oil market has shown that the production of oil in the world is growing every year. A small fall in production occurs only during the global economic crisis (Euan Mearns, 2015).
The demand for oil products is less inelastic because this commodity is related in our modern world as a prior necessity. Demand for oil is determined primarily by rate of world economic growth, as well as a number of other factors, which include the structural characteristics of the demand for oil, the energy intensity of the economy, climate (weather) conditions, the level of energy-efficiency technologies and the relative competitiveness of other fuels. Demand for petroleum products, especially gasoline, had risen sharply in 2015, as consumers took advantage of low prices. However, consumption has slowed in the US at the beginning of 2016, as well as the warm weather led to a reduction in demand (D1). Rising oil demand and an increase of cost may signal to investors about the recovery in the manufacturing sector. The decrease in demand indicates the emergence of negative trends in the oil market ($20 Is the New $40, 2016). The leading role in the formation of global demand for oil industrialized countries play. Regionally three dominant centers of world oil consumption are North America, particularly the United States, Western Europe and the Asia-Pacific region, especially China and Japan.
So, we get new market equilibrium on the oil market and new price. The price at the level of below $30 a barrel is very low, and such price situation didn’t happen since 2003. But, the oil prices will rise as the demand won’t be so low for a long time. Production of oil is now almost at a record high level and oil tanks are almost filled. Therefore, it is necessary to increase of grew for the balance of supply and demand.
Conclusion
Now supply of oil on the market exceeds demand. Storage of oil is almost filled. Many oil producers face a choice either to sell oil at a price that the buyer assigns or stop production because to store the extracted oil has no place. As a result, the market began to operate the mechanism of regulation, when oil prices are at a minimum, and the companies, which do not want to work at a loss leave the market. The supply will be slowly declining. First of all, this process has affected the country with the highest cost of oil production, as the USA. Market regulation mechanism began to operate in the oil market since the previous market price of oil exceeded the cost by hundreds, and sometimes thousands percent. The demand on oil market is declining, especially in China and India. Considering the excess of supply over demand, the price of WTI crude oil in 2016 will be in the range 25 - $ 40. The global oil market is one of the largest in the world., and oil prices are determined largely not even the current supply and demand balance, as determined by the trends, risks and threats, and political factors, which depend on a huge number of factors.
References
Euan Mearns, E. (2014). Oil Price Scenarios for 2015 and 2016. Retrieved June 25, 2016, from http://euanmearns.com/oil-price-scenarios-for-2015-and-2016/
$20 Is the New $40; the Oil Market. (2016, January 16). The Economist (US). Retrieved June 25, 2016, from http://www.economist.com/news/finance-and-economics/21688446-why-oil-price-has-plunged-20-new-40
