Spotlight: Oversupply, strong dollar push oil prices to historic low

The global oil market has probably experienced one of its darkest moments last week as crude prices plunged below 30 U.S. dollars a barrel, the lowest since 2003.

Thanks to reports that some major crude producers intend to cut output, the mood in the market improved and prices rebounded and managed to stand above 31 dollars on Wednesday.

Market analysts have pointed out that the latest oil market tumult was mainly due to speculative operations, but in the long run, the fundamentals about supply-demand balance and the strength of the U.S. dollar are still the most important factors in deciding the prices of oil and other large commodities.

The current oil price slump began in the second half of 2014, triggered by an increasing surplus in supply as producers refused to cut production in face of slowing global demand.

According to statistics from the International Energy Agency(IEA), the global oil market now faces a severe oversupply and the average daily surplus could be as high as 1 million barrels this year. In its first oil market report issued in 2016, the Paris-based organization said global inventory will increase 285 million barrels.

A strong dollar has also weighed on the oil market. Since the U.S. Federal Reserve announced in December its decision to raise interest rates, the dollar has been climbing in value relative to other currencies.

On the one hand, a rising dollar prompts investors to decrease their stakes in dollar-denominated commodities like crude oil, therefore sending prices lower.

For many oil producing countries, the depreciation of their currencies against the dollar means lower production costs and that could further push down crude prices.

A recent Morgan Stanley report said it is excessive supply that has brought crude prices below 60 dollars, while a rising dollar is the main factor dragging the prices from 55 dollars to 35 dollars.

In its annual Commodity Markets Outlook, the World Bank lowered its price forecast for 37 of 46 commodities, including oil.

Oil prices would decline another 27 percent in 2016 after plummeting by 47 percent last year, according to the outlook.

While some attributed the turbulence in the oil market last week to the so-called China factor, many believed that the major elements pushing down oil prices are still in place and the recent market rout is driven by panic instead of slowing growth in China.

Ethan Harris, managing director and co-head of global economics at Bank of America Merrill Lynch, said the market appeared to have overreacted to China's economic outlook because even if the Chinese economy slows down, its growth rate would still be among the highest in the world.

Various global financial institutions and leading rating agencies have predicted that the Chinese economy could slow further in 2016 but there is no risk of hard-landing.

Gary Cohn, president and chief operating officer of Goldman Sachs, noted that China is actively pushing for economic restructuring and it cannot be done overnight.

While it is unrealistic to hope for double-digit growth in the country, the world has to get used to the new normal of the Chinese economy, he added. Endi