Oil prices were stable around $100 to $ 110 in the last four years and both oil exporting countries and impOrting countries were factoring this price in their calculations. Now it is at five year low.
What has gone wrong fundamentally? A few things.
1. Potential economic slowdowns in Europe and China are cited as one of the principal reasons. China is the major importer of oil. Oil prices surged thru 2000s be cause of the global demand with China growing at neckbreaking speed.
2. As oil prices surged many oil companies started exploring difficult terrains and different techniques. In United States, companies started using f racking and horizontal drilling boosting the oil supply. US is emerging as net exporter of oil and natural gas shortly, say in a year’s time. From a massive importer to a net exporter changes the market dynamics. They are already burning surplus natural gas and has been strong lobbies for export of natural gas to Europe. Since 2004, US production is up by 60 percent. US has surpassed Saudi Arabia as the largest producer of oil in the world. It is rumored that US no longer huge secret oil reserves. This will also add to supply and impact prices.
3. Because of high oil prices, Oil find and extraction in Canadian oil sands in Alberta and other places led to marginal increase in supplies.
4. Transportation is the only sector where substitution of oil has been a major challenge. In all other areas, there has been increased substitution thru nuclear energy and solar energy.
5. Similarly Europe has been bracing for lesser reliance of oil imports from Russia. France, UK led with tidal energy.
6. Oil exporting economies are now forced to pump more oil. With dominance of USDollar as a major currency for oil transaction settlements, Oil economies are in for a shock. In order to maintain their dollar realizationse, Oil economies are forced to pump more oil to maintain their dollar realizations. OPEC has gone on record that they will not cut on supplies an indication of things to come.
Some other reasons:
7. Unconfirmed reports quote that this is being used to break the back of Russia. Sanctions placed on Russia, after Ukraine conflict had only marginal impact. Russia has signed multi billion dollar deal with China for supply of oil thru currency swap agreement to snub US. In the ensuing cold war, decreasing oil prices will have crippling effect on oil dependent Russian economy. All conspiracy theories are floating. Russia has already spent close to $6 b to defend depreciating Rouble. Russia has to scale down its military budget, at this rate.
8. Same is the case with other countries like Iran, Libya, Iraq. They have to pump more oil to keep their economic engines running.
Other technical factors:
9. Oil prices like other commodities have inverse relationship with dollar price movement. When dollar was depreciating some years back, Oil prices kept rising. With dollar is on the up, with nearly 7 percent appreciation against major currencies, Oil and gold prices are on the downswing.
10. Paper oil. Derivatives trade in oil play a very dominant role. Hedge funds feed on strength or weakness in price movements. Like strength beget strength in such trade, weakness and major support levels are broken, huge short positions are reported to have been built up.