Cheaper Fuel

27th January 2016

To the end of 2015 we motorists were enjoying petrol at less than £1 per litre, courtesy of the UK's supermarkets Tesco, Sainsbury's, ASDA and Morrisons.

Since that article was posted in late November 2015 the price of oil per barrel has fallen from roughly $40 a barrel to $29.35 a barrel today (Source: Bloomberg).

The price of oil has fallen so rapidly because there is a global oversupply of the world's most traded commodity. The great supply in oil we are experiencing currently is due largely to the extraction of shale oil through hydraulic fracturing (fracking). The extraction process is now the main method of obtaining oil in the US, which has placed the country as currently the number one oil producer in the world.

Saudi Arabia is now in second place in the global supply of oil and is maintaining production at similar levels despite the price drop and much to the disappointment of other OPEC (Organization of the Petroleum Exporting Countries) nations, which need the price to be much higher to balance their budgets. With the economic sanctions lifted off Iran, more oil is now entering the world global market.

Therefore the price of oil is due to stay low for the foreseeable future with the global oversupply. However as almost all markets the oil market is also cyclical, so low prices cannot be expected forever. With the current low price, investment in the industry will also be low; as resources diminish the price will eventually rise again.


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