Two recent articles paint different pictures of the oil market.

No End in Sight for Oil Glut
by: Russell Gold
Aug 21, 2015
Click here to view the full article on WSJ.com

TOPICS: Oil Markets

SUMMARY: When oil prices started to edge down a year ago, most energy mavens thought the drop would be small and short-lived. Instead, the price of crude has plunged by almost 60% from its 2014 peak.

CLASSROOM APPLICATION: Students can evaluate the factors that have caused declining oil prices and examine whether a firm, or in this case oil producer, would optimally maintain output while facing declining prices.

QUESTIONS: 
1. (Introductory) What factors have caused the increasing supply of oil?

2. (Introductory) Why are oil companies suspending deep-water projects?

3. (Advanced) What are possible reasons for an oil producer to increase oil production while facing declining oil prices?

4. (Advanced) What is the effect declining oil prices on the demand for gas guzzlers?

Reviewed By: James Dearden, Lehigh University

Here is a graph from the article.

Here are some questions.

1. Does the graph depict demand and supply or the quantity traded and quantity produced?
2. What would you expect to happen to the price of oil between 2013Q1 and 2015Q2? Click here to see what happened.
3. If revenues for a county increase when it increases production and prices are low, would would happen to revenues when a country increases production and prices are high? If the answer is the revenues would increase, why didn't the countries increase production BEFORE the price of oil fell?
4. When is the quantity supplied greater, when producers expect the price of oil to increase or when producers expect the price of oil to decrease? What do you think expectations were in 2013Q1? 2015Q2?
5. What is the impact on the future quantity supplied when producers suspend work on deep-water projects and push back oil-sands projects?

Oil Prices Soar Amid Lower U.S. Output Estimates, OPEC Article
by: Nicole Friedman
Sep 01, 2015
Click here to view the full article on WSJ.com

TOPICS: Oil Markets, Supply and Demand

SUMMARY: Oil prices soared Monday, marking their strongest three-day rally since Iraq's 1990 invasion of Kuwait, on doubts the global glut of crude would be as long-lasting as many investors and traders had earlier believed.

CLASSROOM APPLICATION: Students can evaluate the cause of Monday's increase in oil prices. They can also evaluate whether a response in oil production to oil price increases would be a movement along a supply curve or a shift in a supply curve. Furthermore, they can evaluate the length of a decline in oil prices required for oil producers to decide to shut down production.

QUESTIONS: 
1. (Introductory) "The newly released federal data confirmed that U.S. oil output has taken a hit from falling oil prices, as new investments have proven unprofitable and some companies have struggled to stay afloat. The number of rigs drilling for oil in the U.S. has dropped by 58% since October...." Does the above report imply that the drop in U.S. drilling is a shift in supply? Alternatively, is it a movement along the supply function?

2. (Advanced) "Many analysts argue that oil prices still need to stay low for an extended period to force more production cutbacks in the U.S. and elsewhere." Why would an extended period : as opposed to a short period : of low oil prices be required for oil production cutbacks?

3. (Advanced) What investment strategy prompted the three-day rally in oil? Why did investors adopt the strategy?

Reviewed By: James Dearden, Lehigh University