The oil industry is driven by booms and busts. Prices typically rise during periods of global economic strength during which demand outpaces supply. Prices fall when the reverse is true, and supply exceeds demand. Meanwhile, oil supply and demand are driven by a number of key factors:
- Changes in the value of the U.S. dollar
- Changes in the policies of the Organization of Petroleum Exporting Countries (OPEC)
- Changes in the levels of oil production and inventory
- The health of the global economy
- The implementation (or collapse) of international agreements
Notably, 2015 offers an interesting example of how all five factors can conspire to send prices to historic lows. At that time, the price of crude oil fell by more than half in under a year, reaching lows that had not been seen since the last global recession.
At the time, many oil executives believed it would be years before oil returned to $100 per barrel. They were right, at least as of July 30, 2021, when the price of a barrel of crude oil was $73.95.
Five main factors can be identified as having driven crude oil prices down and kept them down.
- The year 2015 was a perfect storm for oil prices.
- The dollar was strong. Inventories were huge. The economy was weak. And production was growing.
- All of these factors drove the price of crude oil to less than $40 per barrel.
1. The Dollar Strengthens
In 2015, the dollar was at a 12-year high against the euro.
That put pressure on market prices because commodity prices are usually quoted in dollars, and they will fall when the U.S. dollar is strong.
For example, the surge in the dollar in the second half of 2014 caused a rare sharp decline in all of the leading commodity indexes.
2. OPEC Retains Production Levels
OPEC, the cartel of oil producers that sets production levels, was unwilling to prop up the oil markets by cutting its production levels.
The oil ministers said in a statement that they had "concurred that stable oil prices – at a level which did not affect global economic growth but which, at the same time, allowed producers to receive a decent income and to invest to meet future demand – were vital for world economic wellbeing."
Prices of OPEC’s benchmark crude oil fell by a whopping 50% after the organization decided against cutting production at that 2014 meeting in Vienna.
3. Global Inventory Grows
The prices of crude futures declined in late September 2015 when it became clear that oil stockpiles were growing amid increased production.
The Energy Information Administration (EIA) reported that global oil inventories increased in every quarter of 2015, with a net inventory build of 1.72 million barrels per day. That was the highest rate since at least 1996. By the end of 2015, oil prices were below $40 per barrel, the lowest level since 2009.
Total oil production by the end of 2015 was expected to increase to more than 9.35 million barrels per day—higher than previous forecasts of 9.3 million barrels per day.
4. The Economy Weakens
While the supply of oil became increasingly abundant in 2015, global demand for oil was decreasing. The economies of Europe and developing countries were weakening. Vehicles were becoming more fuel-efficient.
Meanwhile, China's devaluation of its own currency suggested that its economy might be weakening as well. Since China is the world's largest oil importer, that was a huge hit to global demand and caused a negative reaction in crude oil prices.
5. Iran Makes a Deal
In July 2015, the U.S. and several other world powers signed a deal that lifted economic sanctions against Iran.
The Iran nuclear deal, as it became known, freed Iran to start exporting oil again. Investors feared it would add to the world's oversupply of oil, dragging down prices even more.
(Iran withdrew from the agreement in 2019 after then-President Donald Trump ordered the killing of Iranian General Qasem Soleimani. President Joe Biden has indicated a willingness to see it reinstated.)