Falling Misery of Oil

We might have seen people skidding by stepping on the oil, but now the oil itself has started skidding. One of the major commodities of the world (Crude Oil) is bleeding, putting itself in the position of coma.

No one can deny the fact that oil is one of the essential resources which everyone in the world needs. But the fact of the matter is there should be a balance in both need and catering the need. Few of the renowned producers of crude oil, namely, Saudi Arabia, Russia, US and the OPEC Nations seems to be failing to understand this and have came up with tremendous output of 32.8 billion barrel/year wherein the demand was much less than this. This is apart from the amount of oil reserves these countries were sitting on. It has been largely contributed by the shale revolution, which made the US surpass the market leaders Russia and Saudi Arabia, by producing 1.6 million barrel/day (a rise of 45% in the past 4 years) or thereabouts, making a vast difference between the demand and the supply.

Though some analyst feel that the growth in the supply is good and normal, the key consideration of demand wasn’t taken into account, which grew up only by 4%. One of the biggest consumers of crude oil, China, had a structural shift of moving from production based to consumption based economy, making the oil demand to fall. The economic downturn and inefficient policy measures of countries of Europe, Asia and US have also tapered off the demand.

It is quite hard to talk about the supply side since the big giants are not transparent enough about what they produce. Though Saudi Arabia and OPEC Countries had the power in stabilizing the price by cutting down its production, it didn’t step in to do so, for the simple reason that they will lose their market leadership. On the other hand Russia was also not able to trim its supply since their economy was not shaping up because of social issues, raising unemployment and poverty levels. 70% of the total revenue of the Russian Government is contributed by oil exports and it would turn up miserable if they try to cut down the supply.

This worldwide oversupply made the crude oil price fall by nearly 55% in the oil prices from the high of $115/barrel in June,14 and a fall of 80% from its 20 year high. Though, the fundamental reason might or might not justify the 35% fall, what could possibly do is the mentality of the investors who developed fear of the huge disparity and the global weakness. The worst part is that, it happened in tranches which make the commodity fall consistently breaking all its levels.

With the recent market expectations, I personally feel that the prices of the crude would stabilize around $40 odd levels since there is an anticipated pick-up in demand because of the world’s biggest human migration boosting the use of gasoline, oils. The recent data of the US also cited that around 80% of US citizens are having 4 wheelers and there is huge amount of growth seen in that segment paving way for the requirement of petroleum products.

Though it is expected that the Iran’s production is expected to increase as sanctions are lifted, the recent report of Goldman Sachs stated that the shale production has dropped significantly. IEA also sees a sliding of OPEC countries supply as well as an expected decrease in supply from Russia. This would make a balance in the demand and supply making the prices bottom out and starts consolidating.

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