Portfolio

Oil remains on a slippery slope

Anand Kalyanaraman | Updated on January 22, 2018 Published on September 13, 2015

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In June last year, it was difficult to guess that crude oil would fall off the precipice within months. The Islamic State (IS) was rampaging across Iraq and fears of supply disruption in the country had sent Brent oil up to $115 a barrel. But then, the pincer of global oversupply and slack demand put oil on the slippery slope. Declining steadily, Brent was down more than 50 per cent to about $45 a barrel by January this year.

A recovery to about $65 until mid-May was short-lived and the fuel again slipped to $40 last month. It currently trades at about $47 a barrel. While it’s a mug’s game trying to predict crude oil prices, it is likely to remain under pressure at least in the near term — the factors that caused the rout remain in place and seem to be getting worse.

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US-Saudi standoff: The oversupply in the crude oil market was caused primarily by a sharp rise in shale oil output in the US, aided by technologies such as hydraulic fracking. Rapid growth in its domestic output in the country, which is among the largest consumers of oil, saw its imports decline.

The Organization of the Petroleum Exporting Countries (OPEC), dominated by mega producer Saudi Arabia, faced a huge challenge. It responded not by cutting output to support oil prices, but instead maintaining production levels to preserve market share. This accelerated the fall of global oil prices.

The Saudi plan ostensibly is to push US shale oil producers out of business by making it unviable for them to produce at low prices. Between January and May, this seemed to be working. But then, as prices started creeping up, many US shale oil producers found it viable to make a comeback and crude oil slipped again.

The high-stakes standoff between deep-pocketed Saudi Arabia and US shale oil producers continues, with the OPEC deciding to maintain production levels at its June meeting.

Saudi output, in fact, hit record levels in July and August. The US, the world’s economic superpower, is unlikely to let go of the opportunity to secure its energy independence and add to its geo-political heft.

Meanwhile, the entrenched incumbent oil exporters will fight for market share until they can. Supplies have also been increasing from countries such as Iraq and Libya, despite the ongoing strife there. Even if other OPEC producers such as Venezuela which are under severe financial strain break away from the Saudi tent and cut output, mega producer Russia, which is not part of OPEC, is unlikely to oblige in a hurry. Its economy has already been hurt badly by the sanctions imposed by the Western powers over the Ukraine dispute and it needs the oil money.

The Iran factor: The impending lifting of sanctions against Iran will add significantly to the global oil supply in the coming years. This could exert further pressure on prices. The US Energy Information Administration had estimated that $5-15 a barrel could be shaved off oil prices in the short run if and when the sanctions against Iran are lifted.

Global demand woes: Weak economic conditions in China, among the largest oil importers, also had a big role to play in the crude oil slump. The events of the past few weeks suggest that the pain there is likely to get worse. The European economies are also not in the best of shape. This does not spell good news for crude oil.



Published on September 13, 2015
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