Over the last four weeks, the cost of an oil barrel has lost 20% of its value.
On 29th October, a barrel of oil was valued at $77.62, but by 23rd November, this number had dropped to US$58.80 /per barrel. This is the largest fluctuation in price since the 1990s.
Why is this?
The US and Iran relationship deteriorated over the year, leading to the US pulling out of the Joint Comprehensive Plan of Action (which limited Iran’s nuclear weapons and set trade deals). Scrapping these trade contracts and trying to limit Iran’s trade with other countries further limited the fuel supply. This means that the price of the barrel rose to US$85/per barrel in October. However other oil producers, including the U.S, Saudi Arabia and Russia, started to over supply to make up the shortfall, ensuring that there was no shortfall in global supply.
This over supply also helped when global economic activity slowed with the ongoing trade war between the U.S and China. Finally, the International Energy Agency (IEA) warned that high oil prices would hurt consumers and could slow fuel demand.
With the market currently well supplied, the drop in demand has started the price of the barrel to drop. This news was also followed by reports that the U.S has granted exemptions on the Iranian sanctions to top buyers of Iranian oil, which removed any concern over supply.
However, despite warnings OPEC discussed cutting output from 2019 by 1 million barrels per day. In response, the IEA stated that any supply cut would have a negative impact, and would erode consumption.
It’s always difficult to predict the future of oil prices when they are affected by so many variables. Additionally, as traded in US Dollars, any degradation in the value of the British Pound will adversely affect UK prices, as we have seen through 2018. With uncertainty around Brexit, oil prices could be somewhat volatile for the months ahead.