Joe Watson Gakuo: Oil and Gas Prices Fall, Gain

Why does the price of oil keep falling? Back in June 2014, the price of Brent crude was up around $115 per barrel. As of January, 2015, it had fallen by more than half, down to $49 per barrel. The impact of such a fall is unimaginable.

Countries are in economic brink and some companies in this sector may not recover from this. To understand this, we first have to go back to the mid-2000s.

Oil prices were rising sharply because global demand was surging especially in China, and there simply was not enough oil production to keep up. That led to large price spikes, and oil hovered around $100 per barrel between 2011 and 2014.

As this happened, many oil companies found it profitable to start extracting oil from hard-to-drill places and formation. In the US, companies began using techniques like fracking and horizontal drilling to extract oil from shale formations in North Dakota and Texas.

In Canada, companies were heating Alberta’s oil sands with steam to extract usable crude. This led to a boom in “unconventional” oil production.

For much of the past decade, oil prices have been high bouncing around $100 per barrel since 2010. This was because of soaring oil consumption in countries like China and conflicts in key oil nations like Iraq.

Oil production in conventional fields could not keep up with demand, so prices spiked. What we all never saw was that those dynamics were shifting beneath the surface.

By late 2014, world oil supply was on track to rise much higher than actual demand. A lot of unused oil was simply being stockpiled away for later. So, in September, prices started falling sharply.

Crude Oil Price Decline

As the prices slid, many waited for OPEC to make a move to cut production. This did not happen and the prices went on a free fall.

This is going to be a very interesting year for oil industry. If you are keen to play in this sector, hang in there. We are much closer to the bottom than the top.

Once we hit the rock bottom, the only way out will be up. The oil industry has survived much worse cycles and good management teams know how to survive until oil and gas prices move higher.

If oil demand remains weak and production stays high, prices might not bounce back for some time. If history is any indication, oil prices will eventually rise again. But the world is full of potential surprises.

Conflict could break out again in oil producing countries like Libya or Iraq, which would hamper oil production. China’s economy could come roaring back.

Europe could suddenly rebound out of its crisis. Saudi Arabia could decide that enough is enough and cut back on production all of the sudden. Any of those things could increase prices.

Article first published in Kenya's Business Daily Newspaper.