Oil prices continue to dive and although the rock bottom prices are good for American drivers, there is no doubt that they are a bad thing for world stability. Oil prices have collapsed over 65 percent since their high 18 months ago. The bare-bottom price at the pump has been a boon for car owners, acting like a tax break for consumers and putting money right back in their pockets. But the strength and rapidness of the decline has had a destabilizing effect on the rest of the world.
Major oil producers such as Russia, Venezuela, Iraq, Saudi Arabia, Nigeria and even Iran have been crushed under the weight of the drop in oil prices with most of these countries finding it impossible to stop the production of the commodity which only adds to the major glut of oil reserves which has become part and parcel of the problem itself.
And with China, the world’s second largest economy and the world’s largest oil importer, entangled in market frenzy, analysts are in a spin about how quickly the Chinese economy is cooling down and how far it will go in adding to the drop in demand for the black gold.
Oil prices continue to dive and although the rock bottom prices are good for American drivers, there is no doubt that they are a bad thing for world stability.
Strong $USD = Low Prices
Analysts have attributed the slump to a global supply glut brought about by slowing demand and high production. However, the strong U.S. dollar is seen as another cause for the nosedive in oil prices and in the view of analysts at Morgan Stanley, the mighty greenback could send oil plunging to as low as $20 a barrel in quick order. In fact they go as far as predicting that even 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 $8 per barrel.
The International Energy Agency expects the oil market to remain oversupplied throughout 2016. And a strong dollar could squeeze prices even further, making oil more expensive for buyers paying with other currencies. That can weigh on demand and prices.
The situation in China and the relationship with the yuan is of particular concern for oil prices. The yuan has already fallen about 6% since last August and any move by the People's Bank of China to devalue the yuan even more could put additional pressure on oil prices as China is the world's biggest importer. Strong demand from China is crucial for oil markets that are already facing huge oversupply. Other analysts recently noted that another demand shock from China could send U.S. crude futures tumbling towards $25 a barrel.
The PBOC has been guiding the currency lower against the dollar in order to aid Chinese exporters and prop up weakening economic growth.
Another factor in the situation is the breaking off of diplomatic relations between Iran and Saudi Arabia, up until now rival producers in the oil industry. Iran is gearing up for a big return to global markets in 2016 after years of sanctions which will only add to the already bursting OPEC supply and there seems
to be little chance that either of the two countries will reign in oil production. OPEC has refused to cut output in December to support prices as it continues its year-long strategy of trying to squeeze out higher cost producers in the U.S. and elsewhere.