Author`s name Dmitry Sudakov

Oil market nears its collapse

August 5 became a black day for the world oil market. Quotations of nearest futures on Brent oil at the London Exchange dropped below the psychologically important level of $120 per barrel – to $118,36 per barrel. The reduction of prices continues throughout the day at world’s leading exchanges on all sorts of black gold.

Yesterday’s reduction followed another drop in prices on August 4, when the September contract for Brent oil at InterContinental Exchange dropped by $3,50 and closed with $120,68 per barrel. At New York Mercantile Exchange the price of the futures contract on WTI oil with shipments in September reduced by $3,69 to $121,41 per barrel. Neither the fire on the refinery of Valero Energy Corp. in Houston , nor threats to cut oil supplies from Iran could prevent the landslide of prices.

The market had no positive reaction to the above-mentioned favorable events. It brings up the idea that the market gets rid of all of its speculations and pays most of its attention on the correlation of demand and supply. This may testify to the beginning of a new long-term downward trend.

As for the market supply, it transpired recently that OPEC countries had been increasing the oil output for three months already. It was hardly noticeable against the background of the speculative boom of the recent months. Speculators gradually leave the market, which makes the increase of supply more obvious.

The state of affairs is even more alarming in the field of demand. The consumption of petroleum products in Europe and the USA has been declining against the background of the general economic setback. Europeans prefer public transport over their personal cars now. Daily car rides become more and more expensive for many European families.

Serious changes take place in the United States too. Many Americans refuse to purchase cars with big engines which traditionally enjoy immense popularity in the States. Therefore, the consumption of fuel is expected to drop. US consumers are not likely to retrieve their erstwhile activity taking into consideration the fact that the US economy still faces the danger of recession. If recession occurs, the oil consumption will suffer another big blow.

The situation on the Chinese oil market leaves much to be desired too. The Chinese economy has been slowing down recently. Furthermore, China and India can produce an effect of a huge explosion for the market in terms of their oil consumption. The growth of demand in oil in these two countries has largely determined the situation on the fuel market due to the ongoing increase of the number of cars. However, the avalanche of cars that has been flooding the two Asian giants recently can play a low-down trick with the world market of oil.

Millions of Chinese and Indian families live on an extremely fragile income basis. They are fully dependent on the unbelievable economic growth of their nations. The majority of those incomes are not substantiated with actual savings. Even a small reduction of the economic growth in either China or India will inevitably lead to job cuts and lower incomes for the population. If it happens, millions of new car owners will have to walk or ride bicycles again. World’s biggest oil companies will thus pull the market down.