Digging Deeper Into The Great Oil Crash Of 2014

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A February 2015 report from Thomson Reuters titled A Brief History of the Oil Crash provides a plethora of interesting data and statistical analysis regarding the global crude oil markets over the last eight months. The insightful report chronicles both the events leading up to and those precipitating the slide in crude oil prices, and offers some historical perspective on the ups and downs in the oil market.

Libya’s return to the market was turning point

According to authors Jason Bush et al., Libya’s return to the oil markets in 2014 was the straw that broke the camel’s back. Before the overthrow of Moammar Gaddafi and ensuing civil war in 2011, Libya had been producing 1.8 million barrels of oil a day. That amount had been reduced to barely 250,000 bpd since 2012, but rapidly grew to 900,000 bpd over the summer of 2014.

The Thomson Reuters report emphasizes that it was not just about the extra volume of oil being brought to market. Given that global production and consumption of oil are around 93 million bpd, the additional 650,000 bpd amounted to less than 1% of daily demand. According to Bush and colleagues, “the resumption of Libyan exports mattered because it was so unexpected.”

Oil crash: Anticipated loss of supply did not occur

Things looked bad for the oil market in the summer of 2014. The report notes: “With Libya descending into chaos, Syria locked in a civil war of its own and Islamist fighters racing across northern Iraq to threaten that country’s oilfields, fund managers were anticipating a further loss of oil supplies, and it seemed the nearest thing to a sure bet.”

But things did not turn out that way. The Islamists did not manage to capture Iraq’s major oil producing areas and Libya’s output started to rise, catching many folks on the wrong side of the oil trade and scrambling to unload their long positions. By the first of September, fund managers had slashed their net position in Brent- and WTI-linked derivatives by more than 60%.

Oil Crash

Brent prices plummeted more than $13 per barrel (11%) given all this liquidation to the lowest level seen in a year. That was just the beginning of the great oil crash of 2014.  Brent crude was down to $86 per barrel at the end of October, $70 by November 31, $57 by the end of the year and below $47 on January 13, 2015.

Lower demand and increased shale oil production

Oil Crash

Finally, Bush and colleagues highlight that the ongoing economic slowdown in China, low global growth and increased energy efficiency throughout the U.S. and Europe have led to a significant slowdown in the growth of the demand for oil. When you throw in significant additional supply from ramping up U.S. shale oil production (which came about due to higher oil prices), a 50%+ haircut in the price of oil is not all that surprising.

Oil Crash

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