Oil prices are most likely to continue its dipping level. It is expected to go further down to a new low. There are many factors which give a strong signal in support of the above-mentioned argument. They are :
- Newer technology in shell oil exploration– Boom in oil production due to shale oil is expected to continue this year. With the advancement in technology for horizontal drilling, US shale producers are even profitable at $30 per barrel of crude. New reserves are being explored and may start production in coming future. So, there will be a high inventory level of crude which will keep oil prices down.
- The slowdown in China and other developing economies– Slowdown in developing economies will reduce the demand of oil for various directly and indirectly related activities. This will again disrupt supply, demand equation in the crude market.
- OPEC unwillingness to cut oil supply– OPEC countries are unwilling to cut down their supply, according to their press release after the recent meeting of member countries. The Main reason for this is the fear of loss of market share to other countries. They learnt from the past when the reduction in oil supply led to the permanent reduction in market share. They are playing according to the classical theory of prisoner’s dilemma.
- Unrest in the middle-east– The unrest in the Middle East due to ISIS is another reason which may affect oil prices in 2016. But now it has become a moderate issue with the decline in power of ISIS and re-capturing of various areas by territorial armies of Iraq and Syria.
- Sanctions over Iran and Russia– Sanctions over Russia and Iran by NATO and Middle East can force Russia to reduce oil prices even deeper. Presently, Russia’s economy is mainly dependent upon oil export. In the case of sanctions, it may start to export oil to India and China under the special agreement which are largest importers of oil. This will further hamper oil prices.
- Global warming– Global warming may be another factor determining oil demand and hence prices. Uncertain climate change may bring hotter or colder winter in Europe and North America. This may fluctuate demand of oil for heating purpose and may change the price of oil.
Overall for big guns, it is of no incentive to reduce oil supply to the market and hence the market will remain filled with inventories.