OVERSUPPLY in the oil sector is not enough to explain the extent of recent decline in the market, according to research published on the weekend from the Bank of International Settlements (BIS).
The price of Brent crude has fallen by over 50 per cent since June last year, trading at around $58 a barrel last week. Analysts have largely attributed the reduction to the fact that while demand in the market is on the wane, supply of US shale oil is increasing and the Organisation of the Petroleum Exporting Countries has so far refused to cut production.
However, the BIS stated that other factors influencing prices include the increased debt burden of the oil sector. It also said that as the price falls, the producers’ balance sheets are weakened, which is “potentially exacerbating the price drop” through hedging activity and by delaying production cuts.
In addition, the BIS warned that heightened volatility and balance sheet strains among producers could reduce the willingness of dealers to provide hedging instruments to the oil sector.