There are two key reasons why the price of oil has fallen almost 50% in recent months: American shale oil production and a slowdown in European and Chinese demand. While it is still anyone’s guess whether the Saudi gambit of letting its oil wells continue pumping black gold to push American shale oil production to an unprofitable production price point will work, there’s no denying the impact lower demand plays in oil’s price. China’s economic health, in particular, has a lot of oil industry observers on alert. If China’s economic slowdown continues, it’s appetite for oil will continue to suffer.
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Based on China’s November industrial profit figures, it appears China’s pain is far from over. According to November’s figures, Chinese industrial companies posted their sharpest decline in over 2 years-27 months to be exact. This indicates that the short term prospect of a manufacturing uptick in China is probably not going to happen. This might point to continued lower industrial demand for petroleum in China. Not surprisingly, this might lead to more downward pressure on petroleum prices due to weaker demand.
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Keep in mind that the downward trend won’t continue forever. First, American shale oil does have a higher production cost threshold than Saudi oil. There is a point where shale oil extraction through fracking won’t make economic sense and key shale fields in the US will be abandoned-at least until oil prices rebound. Second, continued decreases in the price of oil might stimulate even more oil consumption and travel and this can produce a stable level of support for oil prices for the near to medium term.
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