 "In volatile market, crude oil prices still on slippery ground")
If there is anything certain about the movement of crude oil prices, it is their uncertainty, experts say. The prices are impacted simultaneously by a whole range of global supply and demand factors, apart from the sentiments prevailing in the larger financial markets, making it nearly impossible to predict price movements. And yet, analysts tracking the commodity are perplexed on the nature and extent of the volatility seen in the global oil markets over the past few weeks.
Oil prices recorded a historic decline, plunging consistently from the high of $110 per barrel seen in June 2014 to an abysmal $26 per barrel in February 2016. That was largely the result of excessive and continued pumping by Organisation of Petroleum Exporting Countries (OPEC) — as part of its efforts to maintain market share over high-cost US Shale producers — coupled with the bearish outlook on demand flowing from a slowdown in the Chinese economy, the largest oil consumer in the world. Since February, prices rose gradually to above the $50 mark before Brexit pulled them down last week. Since then, prices have edged up a bit, nearing the $50 mark again.
Analysts say oil prices may seem to have stabilised, at least for now, in the broader $40-$50 range but there are enough drivers to swing the oil benchmarks further in either direction. “It seems crude oil prices have stabilised. Both the Energy Information Administration (EIA) and OPEC are of the same opinion. Although there is enough buffer on the supply side, around 96 million barrel per day, as compared to a demand of 94.2 MBD in 2016, sudden geo-political events leading to even a small disruption might lead to increase in prices,” said Debasish Mishra, partner at accounting and consulting firm Deloitte Touche Tohmatsu. He added that political instability in Venezuela, local militia problems in Nigeria and the continued ISIS threat to Iraq are all possible spoilers for the prices.
On the demand side, the global market has already factored in the impact of Brexit. However, any sudden change in the economic situation and lower demand in China could be a big dampener for the market. With such a tangled mesh of conflicting factors at play, analysts are avoiding forecasts. Mishra, too, does not put any number to his expectations of the price range going ahead. However, other experts say prices are bound to go up given the fundamentals of demand and supply dynamics.
“In the mid- to long-term, prices will go up and cross $50. In the current demand-supply dynamics, many fields are becoming uneconomical. There have been shut downs and production is being pulled out,” said Deepak Mahurkar, leader (oil & gas) at accounting and consultancy firm PwC. “As we do not expect any major increase in the surplus going forward, prices are likely to go up. In the remaining nine months of the current fiscal, there is a possibility of $10-15 rise in prices in the business as usual scenario given the level of economic activity being seen currently. Next fiscal, prices may even go up to $60.”
He also discounted the possibility of any long-term impact of Brexit on prices. “The immediate impact of Brexit in pulling down prices was psychological and momentary in nature. We do not expect any major demand and supply shifts sue to this development and therefore no major consequence on prices either today or in the long run. Any possibility of a dip in demand due to UK’s departure from EU is only remote. In any case, any consequence of Brexit on financial markets will be visible only after two years,” Mahurkar added.
While analysts debate over which factors will drive prices going ahead, supply disruptions and declining US crude inventories have helped cut a global surplus, fuelling a rally of more than 85 per cent since prices hit a 12-year low in February this year. According to the data released last Wednesday by the Energy Information Administration, crude oil inventories at 526.6 million barrels were down 4.1 million barrels from the previous week.
The significance of OPEC
So, has OPEC’s strategy of driving US producers out of the market by continued pumping of oil worked? “OPEC was important for prices and will continue to be significant even in the times to come. But the share of OPEC countries in the world’s oil consumption has significantly reduced,” says Mahurkar. OPEC and its member countries account for 40 per cent of the world’s crude oil production. “OPEC already is pumping more than 30 MBD, almost at 32.4 MBD. Since these are collective limits and there is no country quota, they have very little meaning,” says Mishra.
Another expert, Sambit Mohanty, senior editor at Platts, says shale output in the US has been hit as oil prices fell sharply to below $30 earlier this year. “But we must bear in mind that shale production has the ability to bounce back very quickly as prices move up. We will see that happening but shale producers will be cautious this time. They will keep a close eye to see if the price rise can be sustained over a longer period. The expectation is that oil markets would be neutral to bearish in the very near term. But two successive years of capex cuts globally by producers will get reflected in prices in the longer term,” he says.
Currently, the uncertainty surrounding the British and European economies has depressed the pound and the euro, and the Brexit verdict has strengthened the US dollar, which in turn suppresses crude prices traded in the dollar, thus making it more expensive in other currencies. The shift from an oversupplied to a balanced market — which is presently under way — may overcome the impact of slightly weaker demand due to currency effects. Experts agree that while Brexit has resulted in sentiment-driven price declines, the weakness is likely to be temporary.
Oil prices recorded a historic decline, plunging consistently from the high of $110 per barrel seen in June 2014 to an abysmal $26 per barrel in February 2016. That was largely the result of excessive and continued pumping by Organisation of Petroleum Exporting Countries (OPEC) — as part of its efforts to maintain market share over high-cost US Shale producers — coupled with the bearish outlook on demand flowing from a slowdown in the Chinese economy, the largest oil consumer in the world. Since February, prices rose gradually to above the $50 mark before Brexit pulled them down last week. Since then, prices have edged up a bit, nearing the $50 mark again.
Analysts say oil prices may seem to have stabilised, at least for now, in the broader $40-$50 range but there are enough drivers to swing the oil benchmarks further in either direction. “It seems crude oil prices have stabilised. Both the Energy Information Administration (EIA) and OPEC are of the same opinion. Although there is enough buffer on the supply side, around 96 million barrel per day, as compared to a demand of 94.2 MBD in 2016, sudden geo-political events leading to even a small disruption might lead to increase in prices,” said Debasish Mishra, partner at accounting and consulting firm Deloitte Touche Tohmatsu. He added that political instability in Venezuela, local militia problems in Nigeria and the continued ISIS threat to Iraq are all possible spoilers for the prices.
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Unpredictable future
On the demand side, the global market has already factored in the impact of Brexit. However, any sudden change in the economic situation and lower demand in China could be a big dampener for the market. With such a tangled mesh of conflicting factors at play, analysts are avoiding forecasts. Mishra, too, does not put any number to his expectations of the price range going ahead. However, other experts say prices are bound to go up given the fundamentals of demand and supply dynamics.
“In the mid- to long-term, prices will go up and cross $50. In the current demand-supply dynamics, many fields are becoming uneconomical. There have been shut downs and production is being pulled out,” said Deepak Mahurkar, leader (oil & gas) at accounting and consultancy firm PwC. “As we do not expect any major increase in the surplus going forward, prices are likely to go up. In the remaining nine months of the current fiscal, there is a possibility of $10-15 rise in prices in the business as usual scenario given the level of economic activity being seen currently. Next fiscal, prices may even go up to $60.”
He also discounted the possibility of any long-term impact of Brexit on prices. “The immediate impact of Brexit in pulling down prices was psychological and momentary in nature. We do not expect any major demand and supply shifts sue to this development and therefore no major consequence on prices either today or in the long run. Any possibility of a dip in demand due to UK’s departure from EU is only remote. In any case, any consequence of Brexit on financial markets will be visible only after two years,” Mahurkar added.
While analysts debate over which factors will drive prices going ahead, supply disruptions and declining US crude inventories have helped cut a global surplus, fuelling a rally of more than 85 per cent since prices hit a 12-year low in February this year. According to the data released last Wednesday by the Energy Information Administration, crude oil inventories at 526.6 million barrels were down 4.1 million barrels from the previous week.
The significance of OPEC
So, has OPEC’s strategy of driving US producers out of the market by continued pumping of oil worked? “OPEC was important for prices and will continue to be significant even in the times to come. But the share of OPEC countries in the world’s oil consumption has significantly reduced,” says Mahurkar. OPEC and its member countries account for 40 per cent of the world’s crude oil production. “OPEC already is pumping more than 30 MBD, almost at 32.4 MBD. Since these are collective limits and there is no country quota, they have very little meaning,” says Mishra.
Another expert, Sambit Mohanty, senior editor at Platts, says shale output in the US has been hit as oil prices fell sharply to below $30 earlier this year. “But we must bear in mind that shale production has the ability to bounce back very quickly as prices move up. We will see that happening but shale producers will be cautious this time. They will keep a close eye to see if the price rise can be sustained over a longer period. The expectation is that oil markets would be neutral to bearish in the very near term. But two successive years of capex cuts globally by producers will get reflected in prices in the longer term,” he says.
Currently, the uncertainty surrounding the British and European economies has depressed the pound and the euro, and the Brexit verdict has strengthened the US dollar, which in turn suppresses crude prices traded in the dollar, thus making it more expensive in other currencies. The shift from an oversupplied to a balanced market — which is presently under way — may overcome the impact of slightly weaker demand due to currency effects. Experts agree that while Brexit has resulted in sentiment-driven price declines, the weakness is likely to be temporary.