Falling oil prices a welcome relief to supply chain transportation costs and transportation service providers

As oil prices continue to slide, Supply Chain Station takes a look at the latest situation and reviews how it will impact on global transportation costssilhouette of working oil pumps on sunset background

WTI Crude dips below $60 per barrel

The oil price is continuing to slide with the news that the price for West Texas Intermediate (WTI) has just dipped below the $60 per barrel rate for the first time since the year 2009. Today’s rate at the time of writing (12th November 2014) is $59.25, and according to the pundits, it’s not looking like rallying anytime soon.

Saudi Arabia in a philosophical mind-frame?

The eyes of the world were, of course, firmly fixed on how Saudi Arabia would react to this latest drop. They however remain philosophical in their approach. Oil Minister Alai Al-Naimi is reported as asking why they should  consider cutting production, just because the prices goes up and down and down and up, in the way that commodities normally do.

OPEC letting go of the reins?

It’s certainly an interesting point of view, and one which many find surprising coming from a man who is seen as being the most powerful member of the OPEC oil cartel. This is the same cartel that through its manipulations and its grip on the world’s oil supply has been influencing the oil price as it sees fit. To profess to let it find its natural stabilizing point in the general commodities market place is interesting to say the least.

Lower demand forecast for 2015   

This statement also happens to coincide OPEC saying that its forecast for the demand of oil output in 2015 has been lowered by approximately 300,000 barrels down to 28.9 million barrels per day.  This latest forecast is the lowest since 2002.

The reasons that OPEC gave for their decision not to intervene are twofold. In the first place they cite the fact that oil production around the world has significantly increased, mostly down to shale production coming from North America. The other reason they cite is reduced global demand; something that is brought about by improvements in terms of extracting oil, and greater energy efficiencies.

Is it a ploy to pressurize shale oil production?

OPEC’s new stance may however be politically based. It could be that Saudi Arabia would like to see oil prices dip even lower in order to put pressure on North America’s shale production. With falling profits, the new shale oil producers may make the decision to stop letting the market. This is something that would return Saudi Arabia to its former position as being the world’s top producer. Signs are that this policy, (if indeed it is a policy), could be working, as the EIA has recently lowered its forecast in terms of growth for 2015 by 100,000 barrels per day.

Music to the transportation industry’s ears

In terms of the transportation industry, the new lower oil price is music to their ears, continuing a trend that has been prevalent since June this year. With fuel prices being a significant part of their running costs, both airlines and shipping companies are enjoying more profitable times. It’s something that is leading investors to put more money into IYT (iShares Transportation Average) shares.

Make hay while the sun shines

Buyers need to be quick to take advantage of new low oil prices if only to hedge against other forces that are acting to lift transportation costs. The effects of tight trucking capacity and localised events in North America like the West Coast Ports fiasco pull in one direction, so lower oil prices brings a new bargaining chip into play. With fuel pump prices lower than they have been for many years the stage is currently set for some relief to transportation service buyers and transport service providers too. Enjoy it while you can!


Have your say on the falling oil prices, please send your feedback on the comments section below.

 

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