Oil prices have fallen 74% from its highs of $110 per barrel in 2011 to a low of $27 per barrel on 20 Jan 2016. A supply glut, coupled with weak demand (especially from China), have been the main factors. The rise of U.S. shale oil producers and the refusal by OPEC to reduce production and now recently, upcoming oil exports from Iran (after sanctions were lifted) have all contributed to the short term over supply of oil.

As of 22 Jan, oil has seemed to hit a potential bottom and has now rallied back up to $32. So, how long can oil stay at this level ($27- $32)? What wold it take for oil to rebound back to $60-$70 and even back to $100+ per barrel? Well, it all depends on when demand will suck up the existing oversupply of oil and this in term depends on when oil production start falling.

Oil production will start to fall as more and more oil producers go bankrupt and when OPEC (mainly made up of the Saudi Arabia + Arab States) agrees to cut their output. The reason OPEC has not been wanting to cut their production up to now is because they want these low prices to drive US oil producers out of business (especially the Shale oil producers) so OPEC can reclaim back the market share they have been losing. Of course, these low oil prices have also been hurting the Saudis as well (they have been suffering large current account deficits and have been selling other assets to finance their  government spending).

Let’s look at the cost of producing a barrel of oil:
Brazil $49
Canada $41
US $36
US Shale oil $70+
Saudi Arabia $10