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Price of oil is forecast to drop in 2014

13th January 2014 All News and Offers

home-heating-oil-prices-fallingCommodity traders are whispering about a big drop in the price of oil over the next twelve months due to a range of factors from the emergence of American shale power to the potential softening of sanctions on Iran, which could be good news for home heating oil users.

Analysts at Morgan Stanley predict a possible 20% fall in the price of Brent Crude in the next two years, which would translate into a lower pence per litre for home heating oil users.

Prices at the pump would also be affected. Unfortunately for us, VAT and duties make up around 60% of the price of a litre of petrol in the UK but that would still result in a 8p saving per litre at the pump. That’s about £60 a year for the average motorist (though the fuel tax escalator could eat away at some of that). For haulage companies and others consuming very high quantities of petrol, it’s a not-insignificant cut. And if petrol is cheaper, so is the distribution of goods. That means all kinds of businesses would face lower costs, freeing up money in the economy at large.

The oil price has been remarkably stable – and high – since early 2011. But that could be about to change thanks to three things: the easing of restrictions on Iran, booming output from America’s shale formations and the simultaneous drop in petroleum product consumption in America. The country’s consumption is down 10% on its 2005 peak, largely due to it being replaced by gas.

America is poised to become the world’s largest oil producer by 2015. It’s share of global supply has been growing for a couple of years, but the civil war in Libya and sanctions against Iran have stopped that impacting on the oil price. Things are changing, though, and America’s output is growing quickly. For the first time since the 1990s, it’s producing more crude than it’s importing. Supply is also up in Canada, Kazakhstan and other countries. Saudi Arabia has subsequently dropped plans to increase oil capacity and the UAE is reportedly doing the same.

A slowdown in Chinese growth, which some experts are predicting, would pose an even greater threat to the consumption of oil and would have a downward effect on the price of oil.

If Iran achieves a comprehensive deal on its nuclear programme the road will be paved for the lifting of oil sanctions. Iraq’s abundant reserves are also expected to take a bigger chunk of the market as it rebuilds its infrastructure. There’s much that needs ironing out in both countries but that’s potentially an awful lot of supply.

All in all, it looks like oil prices are heading South. The oil price has been so high and so stable for so long that Opec stopped publishing individual country quotas five years ago, meaning the group production target has been easily ignored by countries keen to cash in. But if prices take the beating analysts are predicting, restricting production will be back on the agenda.