Why History Suggests that Crude Oil May Be Low for Next 2 Decades
(Continued from Prior Part)
OPEC policy during 1985-86 crude oil crash
During the 1985-86 crude oil crash, OPEC (Organization of Petroleum Exporting Countries) decided to defend its market share by pumping more oil. The objective was to hurt production from non-OPEC regions like Alaska, Mexico, and the North Sea in order to capture market share. Oil is the major source of income for OPEC countries. Read How Are Oil Prices Squeezing OPEC Members’ Budgets? for more information. As a result, the tussle for market share led to an era of lower oil prices for the next two decades as the chart in the previous part of the series shows.
OPEC policy during 2014-15 crude oil crash
Record production from the US and Canada led to the oversupply in the market in 2014 and 2015. As a result, OPEC decided to defend its market share by pumping more oil, which was similar to its actions in the 1985-86 crude oil crash. As a result, crude oil prices fell more than 60% since June 2014. The higher break-even costs and production costs of US oil and gas will push oil companies to shut down production due to lower oil prices.
Chevron (CVX) and ExxonMobil (XOM) reported the lowest revenues in many years due to record low oil prices. Likewise, small independent oil and gas companies got crushed due to historic low oil prices. Companies like Swift Energy (SFY), Energy XXI (EXXI), Halcón Resources (HK), and Goodrich Petroleum (GDP) might also file for bankruptcy due to lower oil prices according to a Forbes estimate. The volatility in the market has affected ETFs such as the iShares US Oil Equipment & Services ETF (IEZ), the Vanguard Energy ETF (VDE), and the First Trust Energy AlphaDEX ETF (FXN).
The current market crash is a supply-driven crash. Thus, there is more possibility of prices trading lower. We’ll discuss how supply and demand influence the global oil market in the next part of the series.
Continue to Next Part
Browse this series on Market Realist: