Why the oil price is falling

THE oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $70. This comes after nearly five years of stability. At a meeting in Vienna on November 27th the Organisation of Petroleum Exporting Countries, which controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price tumbling. Also hard hit are oil-exporting countries such as Russia (where the rouble has hit record lows), Nigeria, Iran and Venezuela. Why is the price of oil falling?

The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is closely related to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.

Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

The main effect of this is on the riskiest and most vulnerable bits of the oil industry. These include American frackers who have borrowed heavily on the expectation of continuing high prices. They also include Western oil companies with high-cost projects involving drilling in deep water or in the Arctic, or dealing with maturing and increasingly expensive fields such as the North Sea. But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. These include Russia (which is already hit by Western sanctions following its meddling in Ukraine) and Iran (which is paying to keep the Assad regime afloat in Syria). Optimists think economic pain may make these countries more amenable to international pressure. Pessimists fear that when cornered, they may lash out in desperation.


-The Economist

Calgary new home prices see biggest hike in Canada

New home price growth in the Calgary region led the country by far in October, according to Statistics Canada.

The federal agency reported Thursday that its New Housing Price Index for the Calgary area rose 6.6 per cent from the past year while for the rest of Canada it was up by only 1.6 per cent.

On a month-over-month basis, prices were up 0.2 per cent in the Calgary region and by 0.1 per cent in Canada.

The federal agency said that in Calgary “builders cited higher material and labour costs as the main reasons for the gain.”

On an annual basis, it said price movements at the national level have ranged from gains of 1.3 per cent to 1.6 per cent since September 2013.


-Calgary Herald

Slumping oil prices to impact Calgary resale housing market

Slumping oil prices are expected to impact Calgary’s resale housing market in 2015 with price growth for homes slowing down, says a new real estate report released Wednesday by RE/MAX.

The 2015 forecast predicts that average residential MLS sale price in the city will grow by three per cent to $497,500 from $483,000 in 2014 which will be a hike of 5.9 per cent from 2013.

The report came the same day the Bank of Canada warned that Canadian home prices could be overvalued by as much as 10 to 30 per cent.

House price increases have been attributed to good employment in the energy sector, which has driven migration to the city, said RE/MAX.

“However, in the fall of 2014, the housing market started to show a shift from a seller’s market to a more balanced market, likely due to a decrease in oil prices,” said the report. “The price adjustment in the energy industry should likely have an impact on the 2015 Calgary housing market. While it is still expected to see a slight increase in price, it is anticipated to be less active as potential buyers wait to see if lower oil prices result in more favourable house prices.”

RE/MAX said it expects 2015 to be a balanced market with sales up by about four per cent from 2014 levels.

“Buyers who are looking to move up are likely to drive demand in Calgary’s real estate market in 2015. Also, the low vacancy rate for rentals has made potential tenants look at purchasing sooner than they anticipated.”

The report said the average residential sale price in Calgary was $402,851 in 2011, $412,315 in 2012 and $456,000 in 2013.

“There’s a certain amount of uncertainty at the moment because of what we’ve been hearing in the oilpatch,” said Lowell Martens, of RE/MAX Real Estate (Mountain View) in Calgary. “Are oil prices going to stay down long term? Are they not going to stay down long term? We’ve had such a really good year this year right from the beginning of the year – actually the tail end of 2013 – right up until November. Our market has been pretty active and breaking records.

“The buyers are sensing that the heat is off and we don’t have any need to jump too quickly now which we kind of experienced this year with buyers saying ‘woa, I better get into this marketplace’. Now we’re sensing there’s no big rush anymore.”

According to the Calgary Real Estate Board, year-to-date until Tuesday, there have been 25,011 MLS sales in Calgary, up 10.22 per cent compared with the same period last year and the average sale price has risen by 5.83 per cent to $483,303.

Month-to-date, there have been 426 MLS sales, up 9.79 per cent from a year ago while the average sale price in December has increased from last year by 4.98 per cent to $476,536.

Ann-Marie Lurie, chief economist with CREB, said the board has not finalized its forecast yet for 2015.

“What we’re expecting is that as we look at 2015 and lower oil prices, there’s going to be a lot of wait and see,” she said. “That’s the best way I can describe it. We have to see what that impact is going to be on employment. What will that mean for full-time job growth? Currently there is still some gains expected in employment. That should create stability in the housing market. But I don’t think we’re going to see the gains.

“We might start to see the levels of sales and listings almost pull back a bit . . . Prices will remain stable next year. Even if there is some pullback, that pullback will also occur in listings as well keeping the market relatively balanced.”

Don Campbell, senior analyst with the Real Estate Investment Network, said Alberta’s real estate markets have historically been more cyclical than those in the rest of the country.

“There is good news and not so good news in that history.  Good news is that when there is a dramatic change in oil prices, either up or down, Albertans usually do not over-react for the first six months as they have seen the swings before. This provides a stabilizing force to the markets during the initial shift in oil direction, as we are witnessing right now,” he said.

“However, when the price begins to stay low for six or more months, nervousness begins to enter the real estate market, the consumer confidence and retail sales. The longer the lower price settles in, the more reactionary the Albertan populous becomes. This is when the local real estate markets really begins to over-react, as we witnessed during the Kyoto Accord debate and the 2008 Global Recession. Listings increase, average sale prices begin to drop as it turns into a buyer’s market which has also historically provided wonderful opportunity for homebuyers and investors to pick up homes at relatively inexpensive levels.”

The RE/MAX report forecast the average residential sale price in Canada to rise by 2.5 per cent to $416,300 in 2015 after a 6.2 per cent hike in 2014 to $406,145.


-Calgary Herald