Oil under pressure as IMF cuts global growth forecast

 

images[1]

Oil prices have not settled yet to equilibrium levels as volatility remains high. The main reason for the deteriorating energy prices is structural oversupply, mainly from US shale oil and the recent OPEC long-term strategy to counter the oversupply by reducing upstream investment.

The decline in oil prices also due to unexpected demand weakness in some major economies (China, Euro area, Japan). Interestingly enough, OPEC’s December report is expecting a decline in the supply growth from non-OPEC producing nations by 350k bpd. However, OPEC’s report revised downward the total supply of oil by 800k bpd for 2015. On top of that, the IMF has reduced the world economic outlook downward to 3.5% from 3.8% in 2015.

 

Taking into consideration the various factors involved, it is still too early to predict a floor to the current downturn. So far, oil majors have put on hold large exploration projects and large global infrastructure projects. Furthermore, the drop in oil prices has brought tremendous economic pressure to oil export nations such as Russia, since the ruble plummeted to unprecedented levels, forcing the Russian Central Bank to intervene.