The Politics of Oil.
The Politics of Oil.
Head- Client Advisory at SNMA Enterprise Pvt. Ltd.
The biggest story unfolding these days, globally, is plummeting crude Oil price. Not only has it ruined Oil producing nation like Venezuela, where crude is its economic mainstay, but has also thrown Russia and most of the Middle eastern countries to a sudden economic shake up.
Russia heads for 2nd year of painful recession with ruble having lost half of its value against USD, Saudi forced for austerity measures, US energy sector has to cut more than 90K jobs this year & overall 250,000 Oil workers have lost their jobs, globally.
So what made OIL go this cheap?
The answer is “Simple Economics”. Be it anything when SUPPLY exceeds DEMAND, prices tend to drop & if that continues for longer time then we witness a situation like what’s happening with crude these days- a ruthless decline.
How it all started: – Threatened that North America’s oil boom could grip its market share, OPEC, the oil cartel, stepped up production and forced a price war that has driven oil prices down to below $30 a barrel.
How this story unfolds; –
Source IEA- International Energy Agency.
Till CY (Calendar Year) Q4 2013 Oil demand Stood at 93 MB/D (Million Barrel/Day) and production was lesser at around 92MB/D.
Early 2014 Libya came out of civil war and started pumping around 3 MBD oil in global Oil production, that was the time Europe was struggling with economic downturn, US became almost self-reliant on its energy requirements & signs of China slowing down tapered the OIL DEMAND– below 92 MBD and SUPPLY (92.19 MBD) exceeded demand, which sent crude prices tumbling.
Since then, till today DEMAND- SUPPLY gap widened, CY Q4 2015 – there was almost 2 MBD of excess supply.
What could have been a simple answer to this DEMAND-SUPPLY mis-match is to produce less OIL and keep the prices afloat, BUT this didn’t happen: – Reason: – sheer Politics- OPEC wants to increase its Global market share and make other OIL producing nations dry down & be out of competition.
See the graph above- OPEC has its OIL production since 2014, even when demand was declining, they actioned this to make other OIL producing nation, with higher production cost go unsustainable on low OIL price.
Pic below- Cost of producing OIL- Top Global Producers: –
OPEC (led by Saudi) always knew that it can sustain even dirt cheap OIL prices with their cost of production being as low as $10-$20 a Barrel, whilst elsewhere in the world its $50 upwards. OPEC understands it pretty well that at low crude price, crude production will become unviable for most of OIL producing nation, but they(OPEC) will still be in profits and whosoever cuts its production first will lose its market share- A game – who blinks first
What Next: – OIL today sails at level when its economically unviable to most of the oil producing nations. Even Middle East is feeling the heat at these levels, OMAN wants to wriggle out of this OPEC dictatorship and cut down its OIL production.
Frankly speaking crude at these levels can push entire world to economic recession, we (India) can’t cheer much on low oil prices as our exports/ Out sourcing to Crude producing nation is under tremendous pressure as they cut their spending’s.
BIG Question- What price will OIL settle in 2016: – Crude rallied in last 2 days’ coz of US snow blizzard, a short term relief. I expect the theory of ‘I WILL CUT PRODUCTION AFTER YOU’ is going to be there for some time, Plus Iran will start pumping 0.5 MBD, and I don’t see any spurt coming in demand.
So broadly 2016 has a gloomy outlook for OIL producers. Moody predicts it to be in the range of $40-$45, so does Tom Kloza, founder and global head of energy analysis at data firm Oil Price Information Service.
My Best Wishes.