The price of crude oil has fallen roughly 60 percent since mid-2014,
which has largely been put down to worries of a global glut of crude,
coupled with dwindling consumption.
But after four years of Brent crude remaining
relatively stable at $100 per barrel, changes in production and
consumption "fall short of a fully satisfactory explanation" for the
abrupt collapse in oil prices, a new report has found.
Instead, the Bank for International Standards (BIS) blames the
decision taken by the Organization of the Petroleum Exporting Countries
(OPEC) at a November meeting to focus on market share, rather than
cutting output, for the collapse in the oil price.
A report from the BIS, the global forum for
central banks, published Saturday said the last two episodes of
comparable oil price declines were seen in 1996 and 2008 and were
associated with sizeable reductions of oil consumption and, in 1996,
with a significant expansion of production.
"This seems to be in stark contrast to
developments since mid-2014, during which time oil production has been
close to prior expectations and oil consumption has been only a little
weaker than forecast," the bank said.
"Rather, the steepness of the price decline and
very large day-to-day price changes are reminiscent of a financial
asset. As with other financial assets, movements in the price of oil are
driven by changes in expectations about future market conditions. In
this respect, the recent OPEC decision not to cut production has been
key to the fall in the oil price," the group said.
"We have learned from the past…obviously the oil
market, everybody knows, goes through ups and downs and peaks and
valleys," he said on Thursday.
"We have the resources…we (have) built the buffers
to help us in sustaining our policies and not disrupting them so I am
comfortable that we will be able to continue that," Al-Assaf said.
But OPEC are not the only culprits. The BIS said
the substantial increase in debt borne by the oil sector in recent years
was also a major factor in exacerbating the oil price.
The willingness of investors to lend against oil reserves has
enabled oil firms to borrow large amounts, while energy companies have
issued substantial amounts of investment-grade and high-yield bonds, the
"Against this background of high debt, a fall in
the price of oil weakens the balance sheets of producers and tightens
credit conditions, potentially exacerbating the price drop as a result
of sales of oil assets," the bank said.
"The build-up of debt in the oil sector is a
reminder that high debt levels can induce significant macro-financial
interactions. Such interactions need to be understood better in order
fully to appreciate the macroeconomic impact of falling oil prices,"
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Last updated: 16 Oct 2016
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