It is always difficult to forecast where crude oil prices are heading for the next year or so. However, that said, the world of oil has changed and continues to evolve into one where the price is still being driven by supply. Unlike the past, it is driven by an abundance of supply even with many geopolitical events unfolding around the world.
According to the Institute for Economics and Peace there were just 11 countries (of the 162 they monitor) that were involved in conflict of one kind or another. Had this been the case in early 2008 crude oil prices well may have gone above $147 per barrel—a level that WTI hit in the middle of 2008. Rather, the price of WTI is trading below the psychological $100 level while the spot Brent contract is barely above $100.
Supply trumps geopolitics
As shown in “After the spikes,” (below), even with several geopolitical events evolving around many oil producing regions the spot price of both Brent and WTI have been in a slowly declining triangular consolidation pattern since 2011. Going forward there are no signs that suggest the price of oil is likely to change course. Rather, expect more of what we have seen over the last several years with a slow growing bias to the downside.
Why is this? Let’s start with supply. Yes there are many interruptions in crude oil flow around the world. “Stopping the flow” (below) shows that interruptions in oil supply from both OPEC and non-OPEC countries have been increasing steadily since 2011, yet crude oil prices have been stable and actually in a slight declining pattern as shown in the first chart. Combined interruptions in oil supply were running about 3.2 million barrels per day (BPD) in July 2014 (latest EIA data point as of this writing).