Saturday, January 09, 2016

The Big Oil Drop: Free fall continues...

Almost a year back, I had written about the falling crude prices. Since then the free-fall has continued with oil trading in the low to mid 30s. Alarm bells are ringing across the industry. The time for trying to figure out the reasons for the slide is long gone, though everyone has their own. The sharp slide is already having its impact. Projects worth nearly $35 Billion have been shelved; 200,000 jobs have been cut, the M&A market is warming up for the bloodbath. And the situation is likely to worsen. 

The US Congress has agreed to allow sale of crude outside US lifting a 40-year ban. The Shale boom made US less dependent on external producers. Which was one of the main reasons for bringing the prices down. However with prices down, the producers are in for a hard time, some having shut shop, most cutting activity levels to the bare minimum. Thus the US Congress decision is an attempt to ease the producers as their domestic market is already having a glut. This move might stabilize the US market but is unlikely to lift the prices.

The lifting of sanctions on Iran is likely to bring more cheap oil in the global market this year. Thus putting more pressure on the oil producers. Supply increases further with demand staying same or even worsening given the global economic slowdown.

The sharp drop has resulted in Saudi Arabia having a huge deficit in its budget. The Saudis, who are the only ones with swing capacity, have steadfastly refused to cut production to boost the price. Instead they have taken an interesting decision to publicly list Saudi Aramco.The listing of the world's biggest company could be the biggest financial event of the century, making up quite a bit of the Saudi deficit. Although it would also open their economy to more scrutiny, something which is against their secretive ways. But then tough times do call for drastic measures.

The emergence of Australia as a source of LNG would shift the direction of the global LNG trade away from Qatar. However the low prices have resulted in delays in some of the projects. Thus enabling Qatar to retain its hegemony for a while longer. Meanwhile, Qatar has been doing its bit to retain its market renegotiating supply contracts with the likes of China and India.

Then, the Paris agreement on Climate Change. If every country keeps their end of the promises, their would be shift from hydrocarbons to alternate energy sources. However, the low crude prices have made the alternate energy sources less attractive. We are reaching a stage where the oil is unlikely to run out but environmental concerns would reduce its consumption.

However, the tensions in the Middle East over Syria and the Saudi Arabia-Iran stand-offs might spike the prices up. Throw in further uncertainties like the possibility of Saudis acquiring a nuclear deterrent from North Korea or Pakistan, further escalation in the so called fight against Islamic State (which has captured a big chunk of the oil trade) or the migrant situation blowing up in Europe  But hoping for a war to jack up prices is certainly not good karma. 

Low prices are welcome news (for now) for an energy-importing country like India. The export bill reduces and with it the foreign exchange outflow. However, it comes at the cost of its domestic production which needs a much higher price to be commercially viable.

Times certainly are tough for the people in the oil sector.

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