The US shale boom and OPEC’s refusal to cut production has pushed oil to $56 a barrel on Wednesday. It is going to become the biggest annual decline since 2008.
Pressured by weakening demand and so also a supply glut has all caused the rapid decline in oil prices. Oil stood at $56 a barrel on Wednesday. Global benchmark Brent crude saw a 49% drop caused by a slump in demand, US shale boom and efforts by OPEC to retain its market share instead of cutting production.
On Wednesday a survey revealed that China’s factory sector had shrank for the first time in December. This put additional pressure on the oil prices as demand fell in the second largest economy. Demand concerns are a major issue for the oil industry. Brent fell by $1.42 at $56.48 by 5.35 a.m., after sliding as low as $56.27, its lowest since May 2009. U.S. crude was down 86 cents at $53.26.
USA has come out of its self imposed embargo on oil exports and this could exacerbate the situation and make the battle between OPEC led by Saudi Arabia and other producers. OPEC had contributed to over 50% of the world supply of oil in the 90’s and today its share has fallen to about a third of the oil supplies. Shale oil boom coupled with new supplies from Russia and South America have created a global glut.
The falling oil prices have also sent jitters across major economies like Venezuela and Russia. Venezuela is already in the throes of recession after its economy contracted for the first three quarters of the year, while inflation topped 63 % in the 12 months to November.
Russia is also under extreme strain as its economy is in the red for the first time in five years. Sanctions by US for Kremlin’s support for Ukrainian rebels have started taking its toll on its economy. According to official figures, the GDP contracted by 0.5pc in the year to November. The Oil crunch could not have come at a worse time.