For the better part of 2016, oil prices dominated headlines. The surge in oil production from American shale oil producers and the Organization of Petroleum-Exporting Countries (OPEC) led to a corresponding reduction in price. This was not the first time that oil prices have dropped. Oil prices went precipitously south and dipped to $12 per barrel in 1986. Then, OPEC responded by cutting down oil production only to increase production later. Eventually, it took almost a decade for oil prices to stabilize.
The downward swing in oil prices in 2016 raised a similar specter of low oil prices that might have lasted for a similarly extended period. However, 2017 broke the trend, doubling the price of the 2016 lows. To understand the rebound, it is important to recognize the levels of global supply that was experienced the year prior.
A Supply Glut Led to the 2016 Price Drop
The main culprit for bombing oil prices was the glut of oil in international markets. According to the U.S. Energy Information Administration, shale or tight oil production in America was 4.2 million barrels per day in 2015. That figure constituted approximately 49% of total production in the United States, the world's largest consumer of oil.
The increase in production and availability of oil stateside led to a glut of oil in international markets. The situation was further exacerbated by OPEC's removal of production quotas. Saudi Arabia, the swing producer in the oil market, has continued to maintain its production levels despite a price necessity to reduce supply. American shale producers also refused to back down, continuing to produce oil to retain market share, even as oil prices dropped and made their methods uneconomical and unsustainable. According to the International Energy Agency, oil prices sank to six years lows in August 2015 due to increased supply.
The First Half of 2017
Oil prices declined primarily because of a reduction in supply. In a post on the Morningstar website, analyst Stephen Simko argued in 2016 that “tens of billions of dollars of near-term investment has been cut or deferred, which will lead to global supply staying flat in 2016-17.” Supply did taper off in the first quarter of 2017, but it ran in tandem with demand, and so the price of a barrel of crude didn't change.
On January 1, 2017, a barrel of crude closed at $53.99. In the dead middle of the year on June 11, an international rise in supply and lack of demand brought oil down to $44.68 a barrel, an almost 18% drop in price. However, this is still well above the lows experienced in 2016, when oil fell below the psychologically important $30 price marker and brought commodity markets to near panic levels.
The Second Half of 2017
Oil slacked for much of 2017, dipping numerous times up to the middle of the summer. The decline was less erratic than 2016, but it had pundits speaking of bear territory across the global oil market.
As U.S. production levels fell, other major players in the oil game, including Saudi Arabia, were expected to follow suit. Global demand, which had been rising for the past few years, was expected to increase further in the coming years and did, with daily demand rising from 95.5 million barrels per day in the first quarter of 2016 to 98.61 million barrels per day in the last quarter of 2017.
This demand, coupled with a tapering off of OPEC crude, brought oil to close 2017 at around $66 a barrel, more than twice the price experienced during 2016 lows.
The Bottom Line
Global demand for petroleum is expected to increase by 1.3 million barrels per day with China as the primary driver and the emergence of Iran as a major consumer. Unrestrained drilling by U.S. shale oil producers caused a glut in oil supplies. In turn, prices increased. Declining U.S. oil production should instigate other major producers to drop their prices because as long as global demand rises faster than supply, prices should continue to be driven upward.