Oil predicted to fall to USD20 per barrel

Oil prices has tumbled by some 65% since it peaked in mid-2014 - a crash of previously unheard-of proportions that is threatening to destabilise a host of petrodollar-dependent economies such as Saudi Arabia, Venezuela, Nigeria, Russia, UAE, Kuwait, Iraq and even little Malaysia. The Malaysian government has just announced that its budget, which is just a few months old, will have to be revisited due to the continued downward pressure on crude oil prices.

In this week alone, there has been a fall of 6% in one day and for the year, the price of a barrel has plummeted by 16%. Analysts are now saying prices could fall further to the low USD20‘s per barrel and remain that way for the whole of 2016. The fall in prices has undoubtedly put extra cash into the pockets of consumers globally - all you have to do is look at the US car market where 2015 saw sales for SUV’s and pick-up trucks soar.

Analysts are now looking at a perfect storm of three factors that have created this fall in value:

A Divided OPEC

OPEC has been fighting an economic war to try and squeeze out higher cost producers, particularly those in the USA where fracking has led to increasing levels of self-sufficiency, particularly in Natural Gas production. Some say that this policy also extends to trying to stop Putin’s Russia from supporting Assad in Syria. So, unlike previous times, the member states of OPEC have not reduced supply to support prices. This will be increasingly difficult to do after Saudi and Iran broke diplomatic relations, and just as Iran will be allowed to export oil again after years of sanctions and thus adding to the global glut.

Miss-firing China

Data coming out of China has always been a little hard to believe, but figures just in indicate that the Chinese Service Sector grew at its weakest pace in 17 months. And let us not forget that China is the world’s largest oil importer. Strong demand from China is important but it is clear that the Central Bank of China has been guiding the Yuan down to aid Chinese exporters and prop up weakening demand. Many analysts believe that another demand shock from China could send the price down to USD25 a barrel.

The Mighty Greenback

The strength of the US Dollar is also to blame. Well, at least according to a report published Monday by analysts at Morgan Stanley, in which they say a 5% increase in the value of the dollar against a basket of currencies could push oil down by between 10% and 25% -- which would mean prices falling by as much as US$8 per barrel.

"Given the continued US [dollar] appreciation, US$20-25 oil price scenarios are possible simply due to currency," the analysts wrote. 

As the dollar strengthens, it makes oil more expensive for buyers paying with other currencies. That can weigh on demand and prices, which of course is bad news for petrodollar economies, but better news for the average consumer - that is, as long as you don’t work in the Oil industry where announcements of job cuts seem to be a part of the daily routine.