"The main reason the bank cited for its call is simple supply and demand — there's just more oil being produced now than the world needs, the bank says.
"A boom in shale oil and gas in North America this year and last has drastically increased the amount of oil in circulation. This month, it's expected that the U.S. will pump out more crude oil than Saudi Arabia does — the first time that's been the case since the early 1970s."
"Saudi Arabia could traditionally control the price of oil by limiting supply due to its status as the world's largest pumper of crude. Now, there's a conspiracy theory going around in oil circles that the Saudis are quite happy to let the oil price go into freefall long enough to convince new U.S. rivals it's not worth it to develop their resources.
"Goldman is saying a new oil order has arrived where the Saudis have decided to let the short-term oil price be low long enough to curb U.S. production in the shales," is how Judith Dwarkin, Director of Energy Research for ITG Investment Research in Calgary put it.
As one of the cheapest sources of oil in the world, the Saudis can certainly better afford to wait out the current price lull more than most. Projects in Northern Alberta can't afford to have nearly as much patience. "Oilsands are far more sensitive to drops in price," Dwarkin said. "You don't have to go to $75 to be in pain as an oilsands miner.""
This is what I said nearly three years ago to the day in the Geopolitics of Energy (Nov .2011)
"Systemic imbalances in the global economy are forming, creating the potential for a category five hurricane of volatility and risk. Policy makers once again, despite ample warnings, have failed to buttress the levees. As a result, the storm’s aftermath is likely to be felt for an extended period of time, maybe even a decade. The purpose of this article is to explain why we are entering into a lengthy period of increased economic risk for the oil market and the broader economy.
The swing in WTI futures from contango to backwardation, where contracts are trading below spot, is seen, by some, as evidence that producers are hedging their production with the expectation that the global economy will be weak over the next couple of years Most of the mistakes that will be made in capital allocation over the next twelve months will not be because the decision makers misread the economic environment for 2012; many analysts will misjudge the underlying causes of the 2012 recession and fail to see the broader implications of the systemic imbalances. This article addresses how imbalances in the US, Euro area, and Chinese economies are creating significant demand uncertainty in the global economy for the foreseeable future.
The US, Europe, and China have internal and external imbalances in their economies that are linked to trade policies; these issues will need to be addressed over the course of this decade. The supply of world oil is coming increasingly from unconventional sources like off-shore Brazil or oil sands in Canada. These incremental unconventional barrels come with different cost structures and lead times, as the price of developing incremental unconventional barrels is not constant.
Therefore, the demand for oil will suggest what cost structures and lead times might be funded and accepted and so determines that price (within the envelope of known/reasonably expected technologies and stochastic resource discovery). The issue of oil demand is linked very closely to global GDP growth. We are entering a period of time where global imbalances can no longer go unattended. However, there remains significant uncertainty concerning how these imbalances will be resolved - in an orderly fashion or in response to a crisis? It is certain that global growth prospects will be lower for much of the next decade.
Unconventional oil projects have a life that extends well past a decade. In the past, oil markets experienced boom/bust cycles because of oversupply in the market, and this was an issue foremost in the analyst’s mind. Today the uncertainty in global GDP (and its distribution) over the relevant period (10 to 25 years) is the most significant uncertainty. Even if one could bound global GDP +/- 10% 25 years out, that 10% corresponds to a much bigger number than it would have 25 years ago."