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Crude Price Fall - Will The Euphoria For Consuming Countries Be Short Lived?

| by N.S.Venkataraman

( December 5, 2014, Chennai, Sri Lanka Guardian) Around a year back, nobody really expected that the price of crude oil would fall below 70 USD per barrel. Now many explanations are being advanced for such crude price fall and also guesses are being made as to what extent the price fall would take place and how long it would persist. The question being debated is whether the global crude oil price would stabilise at around 60 USD per barrel.

Some agencies say that the so called recession in Japan and Europe and fall in demand in China could have resulted in crude price fall. However, the credible explanation appears to be that the price fall have been caused due to steady increase in the production of crude in USA in recent months , as a result of the spectacular increase in the investment in shale gas fields, which has resulted in the global supply scenario of crude moving to surplus .

U S remains as one of the largest consumers of crude oil in the world. Until recently, US has been substantially importing its crude oil requirement , not wanting to exploit its own resources. With the production of crude in USA significantly going up, the import level of crude by USA is likely to come down steadily in the coming months. Further, the export of crude from USA is now banned but there are demand by US oil companies that US government should remove this ban. In such case, not only import of crude oil by US will decrease but the export also will take place that would nearly flood the global oil market.

The fact today is that the actual global production of crude is more than the global demand. In the past , whenever such situation has developed , the oil producing countries used to reduce the production to ensure that the supply situation would remain tight. This is not happening now , as several oil producing regions such as Venezuela, Russia, Iraq, Iran are largely dependent on income from export of crude and cannot afford to reduce the crude production , whatever may be the compulsions. Saudi Arabia also does not want to reduce the crude production when others would not do so, as it would result in loss of market share for Saudi Arabia.

In recent years, it has been seen that the price of the crude in the world market is significantly influenced by the speculators , who are not consumers but traders. They buy and sell crude anticipating the price behaviour and profit potential. The current situation is that the speculators have understood that the global market is likely to have substantial oversupply in the coming months, that would result in price pressure and therefore , the speculators do not want to burn their fingers by buying oil anticipating any windfall in profit. As the speculators become hesitant and tend to withdraw to some extent, the demand for oil really come down in the speculative market. This inevitably lead to price fall.

The situation is grim for shale oil producers in north America, as they would break even only at price of 80 dollars per barrel and above, as they have invested huge amount in drilling and the cost of operations are going up. Any price less than $ 80 per barrel would hurt them severely. At the same time, Saudi Arabia, another large oil producer appears to think that it would be comfortable with the price of 60 USD per barrel. Perhaps, by not reducing the oil production and reconciling for the price of $ 60 per barrel, Saudi Arabia wants to make it difficult for the crude producers in North America and drive them out of the market to some extent, if possible.

The likely future scenario would be that the oil producers in North America would try to come to sort of agreement with the other oil producing countries to hike the price of crude in the global market. Certainly, the governments in USA and West Europe would try to make this possible.

China , a large consumer of oil is trying to make the best out of the situation by importing more crude when the price is low and building the stock. However, this can have only a limited impact in the global market, as there are limits for storage capacity.

The biggest beneficiaries of crude price fall are the large importing countries like India and China and other non oil producing countries like Sri Lanka.

However, as of now , it appears that the consuming countries have no particular strategy to convert the present crude price fall into their advantage. While they are having an euphoria now due to the crude price fall, such euphoria may be short lived, as sooner or later, perhaps sooner than later , the crude price would rise to USD 80 per barrel and more due to the manoeuvre of the oil producing countries.

However, the speculators who operate from the gallery will have the last laugh as they scheme and skilfully plan , without the type of botheration and risk that oil producing countries have.

An investigative and well researched analysis of the global crude price trend has now been released by Nandini Consultancy , Singapore. (www.nandinichemical.com)

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