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What's going on?
The oil price is having a bad week! After a calm few months, its fallen almost 10% over the past few days to below $50/barrel its lowest level since early December! (tweet this)
What does this mean?
The concern is, basically, that there is too much oil being produced relative to demand. For example, inventories in the US are at a historically high level. Partly, this is because US oil production has picked up since the oil price increased late last year (i.e. as it became more profitable to drill oil). Now that theres more oil coming on stream, the increased supply is putting pressure on the price.
Why should I care?
For the markets: There are some significant long-term factors that are bad for the oil price.
One factor, as oil major BP and others have pointed out, is that demand for oil is likely to grow at a slower pace over the coming decades partly due to the development of alternative fuels (like solar and wind power). If oil producers believe that the long-term price will stay under pressure, then they will logically try to sell their oil sooner than later. If that happens, it would increase supply and push the oil price down even faster likely hurting the stock prices of oil companies.
The bigger picture: Its not getting any easier for regions with high drilling costs.
On Wednesday, energy giant Shell announced a deal to sell its Canadian oil business. Canadas oil is among the most expensive to produce in the world, partly due to its heavy consistency. Shell ridding itself of high-cost oil might be an indication that it doesnt foresee the oil price moving high enough to make Canadian production attractive anytime soon. Such a scenario wouldnt be good for other high-cost regions like Britain or Brazil.
Originally posted as part of the Finimize daily email.
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