Down Draft

Weak Demand Pushes Oil Prices Lower Despite Global Unrest

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Despite turmoil in the Middle East, gas prices have declined.
  • Why it matters

    Why it matters

    Oil prices spiked during previous conflicts, but decreasing worldwide demand and high output by OPEC countries has kept them down.

  • Facts

    Facts

    • Oil prices have dropped by almost 10 percent this year with North Sea Brent crude selling for under $100 per barrel.
    • U.S. energy self-sufficiency through shale gas exploration has reduced global oil demand, keeping prices lower.
    • Experts warn that lower prices are not sustainable and a price hike could come at any time.
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    Audio

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Experts are baffled. The Middle East is ablaze with conflicts and bombs again are falling in Iraq, yet the price of raw petroleum is sinking, a stark change from past periods of turmoil when prices soared.

When the United States began bombing Iraq during its 2003 invasion, for example, market prices exploded and subsequently rose by a third over pre-invasion rates. Not this time. The price for a barrel (42 gallons) of North Sea Brent oil has fallen by almost 10 percent this year and on Thursday fell below the psychologically significant $100 per barrel.

It’s a bewildering turn of events as the civil war in Syria grinds on. Libya is wracked with internal turmoil, the Gaza strip conflict between Israel and the Palestinians festers and U.S. warplanes are bombing Islamic State fighters in northern Iraq.

At the moment, players in the raw oil market are completely overshadowing the hot spots in the Middle East. “The market has become crisis weary,” said Axel Herlinghaus, senior commodities analyst at DZ Bank AG, noting that speculators have withdrawn from the oil business.

While oil-dependent industries are thrilled by the price decline, it is unwise to embrace the euphoria. The calm in the market is largely due to a fortunate combination of events. Combat in Iraq and Libya, at least so far, is being waged far from areas where oil drilling operations are based. Additionally, global demand is weakening. The once oil-addicted United States has now almost achieved energy self-sufficiency because of its shale gas exploration efforts.

“The market has become crisis weary.”

Axel Herlinghaus, senior commodities analyst at DZ Bank

This has led the International Energy Agency to predict a slight reduction of 0.3 percent in oil consumption in the industrialized nations this year.

Even the Organization of the Petroleum Exporting Countries is contributing to the pressure for low prices to stay down. It used to be common practice for OPEC to strategically reduce production to drive up rates, but these days, OPEC member states are concentrating on increasing production. Now, all important OPEC countries have pushed production up.

“Libya is recovering and Saudi Arabia is producing at a relatively high level,” said Istvan Zsoldos, chief economist for the Hungarian oil and gas company, MOL.

The Austrian energy firm OMV reported a few days ago that oil is again flowing in Libya. “The first ship with Libyan oil is already on the way to supply our refineries in Burghausen,” said Chief Executive Officer Gerhard Roiss.

Some German companies are profiting from the surprisingly low price of oil. Air Berlin, for example, would hardly have been able to get out of the red again without lower fuel prices. The German chemical industry also is happy about prices being lower for its key feedstock.

Yet there is no cause for long-term optimism. Over time, OPEC will not stand idly by as oil prices deteriorate, while an escalation and expansion of the war in Iraq could change the situation in a heartbeat. A steep increase in prices could occur at any time.

“The market participants are underestimating the supply risks,” said Carsten Fritsch, a commodities analyst at Commerzbank.

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