Oil made a nice run last week, gaining 8% before settling just below $50 a barrel. While some analysts hoping that this could be a real rebound, it didn’t last long. At the time of writing on Wednesday morning, NYMEX crude was down to $46.26 a barrel.
So what happened? Why the quick jump, only to be followed by a return to the original spot?
The Roller Coaster Goes Up
After falling to a six-year low in August, the oil market saw some support in the beginning of October. One of the reasons for this is a 6.25% decline in U.S. crude output, which had been growing rapidly for years and contributed to the oversupply problem. Output has fallen from a peak of 9.6 million barrels a day to 9 million barrels a day in September.
The rise in oil prices also coincided with Russia’s decision to launch airstrikes against Islamic State targets in Syria. This may be confusing at first because Syria isn’t a crude oil producer and it doesn’t have significant oil reserves. However, the significance to energy markets lies in its location. Because of the internal conflict between the Assad regime and rebel fighters, the Russian airstrikes add to the tension and analysts' fear that the contagion of conflict may spread to the region at large.
Then Comes Back Down
It didn’t take long for the factors that have kept oil prices down for so long to creep back into investors’ minds.
“The market is all over the place,” said Matt Smith, Director of Commodity Research, commenting to MarketWatch. After a strong selloff Monday, he expected Tuesday’s earlier rebound to “be stunted by weak data out of China and a bearish-tilted IEA report—leaving crude to lick its wounds and consolidate.”
And that’s exactly what happened. It didn’t help that the International Energy Agency released a report Tuesday stating that the oil oversupply will persist through 2016.
Conclusion
With supply being the main issue in the oil market, it’s unlikely that any other factor is going to influence enough change to initiate a full-bore rebound. The problem again lies in OPEC countries like Saudi Arabia, which continue to refuse to lower supply meaningfully to combat the low price trend.
Can you blame them, though? With U.S. suppliers successfully finding ways to cut costs and survive on lower margins, OPEC countries stand to lose a lot of market share if it drops supply and prices increase again.
It’s unlikely that OPEC saw this coming, that oil prices would stay depressed for this long. But here they are and here we are. While a lower oil price is great news for consumers, it’s slowly eating away at global energy industries, making it more difficult for them to adapt. Over time, however, we’ll likely see one of the players give in for the sake of the market. Until then, expect to continue to see oil prices at a low level.
