West Texas Intermediate Crude (WTI), the grade of crude oil used as a benchmark for pricing in energy markets, ended this Friday down again; closing at $59.87. This marks the tenth consecutive day the benchmark oil price has fallen, heralding the longest continuous decline in oil since 1984. WTI entered bear market territory on Thursday, reaching 20% decline from its recent peak of $76.41, in early October of this year.
Two primary factors likely account for this slide. First, global oil production set new records last year, with production reaching 92.6 million barrels per day (BPD), and 2018 production has only increased from there. The record-setting performance was led by the United States, producing 13 BPD. The added supply has helped to drive down prices, other things equal, and the prospect of a continued expansion in production, especially in the United States, will drive oil futures lower — barring a spike in demand or some other exogenous market event.
The second factor affecting the bear market in crude is the recent softening of oil export sanctions on Iran. US sanctions against Iranian oil exports took effect earlier last week, but both China and India received exemptions from the Trump administration and will be permitted to continue to import from Iran.
Both China and India are major consumers of crude; in fact, China is the world’s largest importer of oil, bringing in over eight million barrels a day from abroad. India, too is a major player in crude, ranking fourth in global consumption — with a growth that is expected to overtake China as world’s foremost driver of increased market demand by 2024. With both China and India permitted to import crude from Iran, pressure to supply their gigantic market demand no longer falls wholly on the rest of the global market. In other words, given the size of the markets supplied, allowing Iran to export oil to China and India has the effect of increasing the global supply of crude, and therefore depressing its price.
A depressed world oil price is not necessarily a bad thing. Oil is a primary input into so many production processes that a sudden spike in its price has for decades been cast as the primary catalyst in the recession and stagflation of the 1970s. Oil is one of the few commodities that has the reach and general application in countless markets to produce what some economists call a real (rather than nominal) shock to the economy, and a school of economists known as Real Business Cycle theorists posit that recessions (downturns in business cycles) are the market’s efficient response to sudden and unexpected shocks to real resources (as opposed to other schools that lay the blame for market downturns on nominal factors, such as sudden decreases in consumer demand or the artificial expansion of credit).
Furthermore, a depressed oil market is not good for the economic prosperity or political stability of several states antagonistic to the United States. Russia, Iran, and Venezuela all have oil dependent economies, and Venezuela has already descended into conditions of near total collapse.
The effects of the bear market are many, and market watchers and international relations minds alike should keep an eye on for the foreseeable future.
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