Why low oil prices may last

Jason R. Vaillancourt, CFA, Global Macro Strategist

Jason R. Vaillancourt, CFA, Global Macro Strategist
Co-Head of Global Asset Allocation, 01/30/15

Oil prices, after weakening throughout the second half of 2014, headed sharply lower in November after members of OPEC (Organization of the Petroleum Exporting Countries) decided against cutting production. Crude oil prices began 2015 at about half the level of last year.

oil prices have been cut in half

Both supply and demand were factors

Energy prices are often volatile, but we believe that they are likely to stay near these lower levels for some time because of shocks to both supply and demand over the past few years. Global energy supplies have soared because of increased production in North America flowing from successful technology innovations that facilitate gas and oil extraction. During the course of 2014, expansion of energy production in non-OPEC countries rose above the growth rate of global demand, and the United States emerged as one of the world’s largest oil producers along with Saudi Arabia and Russia.

Meanwhile, demand has moderated for several reasons, including improved energy efficiency in developed economies, a slowdown in global economic activity, and efforts by China’s policy makers to structurally transform the world’s second largest economy. Their goal is to move away from an economic growth model focused on heavy investments in infrastructure and manufacturing for exports, and this transition is reducing China’s demand for energy and commodity imports.

Read the full Putnam Capital Markets Outlook.