By Kunal Dave
The oil industry has had a history of booms and busts, and has been facing the worst of downturns since 1990. Earnings have been down for most of the companies that once hit a mark of record profit resulting in the companies decommissioning more than two-third of their rigs and cutting investments in exploration and production processes. Many companies have gone bankrupt and more than 250,000 workers have already lost their job in the United States alone. Oil prices have fallen by more than 70% when compared to those in June 2014. A few times, prices did recover, but only to fall again, and are now below what some producers need to meet in order to drill profitable wells.
Reason for drop in oil price
The production of oil in the United States has doubled, resulting in reduction of imports to a very small margin. The United States of America, which once used to be a major importer of crude oil, has now started exporting crude oil in a quantity that is almost double than what it used to produce before.
The Middle East, Nigeria and Algeria that once sold their oil in the United States are now competing to sell their oil in the Asian markets.
Oil production in Canada and Russia is rising year by year. Russia has been managing to pump oil at record levels despite facing an economic downturn.The World Bank has warned Russia that its economy will slip by 0.7% if it keeps producing oil at same pace, but Russia wants to continue with the same policy.
On the other hand, OPEC countries are producing oil at their top capacity, and have decided not to change their policies in a recent meeting. While Venezuela, Iran, and Algeria want to cut production, UAE, Saudi Arabia, and other gulf countries do not stand by their terms.
According to IMF,revenues of Gulf countries will slip by $300 million per year. The unhealthy relation between OPEC countries is also a main reason for the drop in price. Many projects in Russia and Canada have been stopped as expenses have risen and oil drilling is not at all profitable. These companies have had to diversify in order to ensure fixed amount of revenues to sustain business.
Iran on the other hand is now increasing its oil productions after the United States lifted the sanctions imposed on it. After the sanction being lifted by western countries, Iran signed a nuclear deal with the U.S. and many other countries. With Iran also coming back in the market, it is expected that prices will drop back again.
The prices are currently between $45-50 and are expected to stay stable for a few weeks. On a long term perspective, the oil prices are expected to remain stable as of now and it might take more than a decade to get back to its price of $120, where it had reached around June 2014.
Implications on Developing Economies
This is good news for developing economies, especially India and China, as they can now reduce their debts with decrease in expenditure. With decrease in price of crude oil, prices of many commodities will decrease, resulting in decrease of expenditure on various commodities.
In order to make their transactions profitable now, OPEC countries will have to compromise on their terms, in order to control demands and satisfy all member nations. Iran, which is the only country producing more oil than the quantity decided, has to ensure balance between demand and supply in order to ensure the stability of oil price.
On 31st October, a Goldman Sachs analyst wrote, “The lack of progress in implementing the production quotas and growing discord between OPEC producers suggest a declining probability of reaching a deal on November 30th.” The OPEC is due to meet in Vienna, to implement its first supply cut in eight years and to get producers from outside to join the group, which is not looking certain in the near future.
As weekend talks failed to come out with concrete details to reduce the global oil surplus and stabilize prices, Brent Crude extended its losses to below $50 a barrel.
“The lack of agreement so far has resulted in further decrease in oil prices, with weakening oil fundamentals warranting oil prices in the low $40s a barrel, in our view, if OPEC is unable to deliver a convincing agreement”, the Goldman Sachs analyst wrote.
Rising OPEC productions in October and a faster ramp up of new non-OPEC projects have reduced the odds that an agreement translates into descent draw in inventories during the first half of 2017, it said, estimating average OPEC output at about 34.2 million barrels a day in October.
OPEC will face formidable challenges in imposing a potential supply deal and monitoring producer discipline, PIMCO’s portfolio manager, Greg Share now, said.
Brent Crude prices, for January settlement, rose 13 cents to $48.74 a barrel on the London based ICE Futures European Exchange. Crude oil has been all over the news on Friday 4th November, regarding the rumours concerning OPEC production swirl. The prices tumbled down to $43.50, which is a loss of over 2% after OPEC sources told Reuters that the Saudis have threatened to raise their supply of oil to 11 million barrels per day,or even 12 million barrels per day, bringing oil prices down and withdrawing from the meeting. However, later a report surfaced that they never threatened to increase the production.
These rumours come at a time when recent survey shows that OPEC productions are coming to a record high in September. As of now crude oil is down by 0.49% at $44.51 per barrel and Brent crude oil which is international benchmark for oil is down by 0.56% at $46.13 per barrel.
Now and again news comes that Russia and OPEC are ready to cut production which takes the price of the commodity, and investors change their view. But it’s only a short lived glory. Oil has always been a crucial element for survival of industries; it is really important to sell it at the right price.
Oil came back from its highest level since July 2015 on Tuesday as new data from OPEC show it’s pumping out huge amounts of oil even as the cartel is getting set to tighten the spigots in the new year.The price of a barrel closed down 86 cents at $50.93 US a barrel. It hit its highest level since July 2015 a day earlier, above $52 a barrel.Oil has marched steadily higher for the past two months ever since rumours came out that the Organization Of Petroleum Exporting Countries was getting close to an agreement to limit how much crude oil it is putting out, starting next year.
This weekend, the cartel will meet with non-members in Vienna to hammer out the details of a deal that is expected to boil down to a cut of 600,000 barrels per day by non-members on top of the 1.2 million barrel cut the cartel has already agreed to.
Tighter supply is good news for oil investors over the longer term, but for now numbers from November show OPEC is currently pumping out much more oil every day, almost 35 million barrels a day.
Russia reported November average daily oil production at 11.21 million barrels a day, its highest in nearly 30 years. That means OPEC and Russia alone produced enough to cover almost half of global oil demand, which is just above 95 million barrels of crude oil every day.
Still, traders widely expect prices to remain elevated into 2017 now that OPEC has reasserted its clout. BMI Research said it expects Brent prices to average $55 a barrel next year as the oversupply that has long weighed down prices comes to an end.
“The OPEC decision will essentially bring forward re-balancing by more than six months, leveraging stronger seasonal demand in the summer to unwind the bloated crude stocks,” BMI analysts wrote in a note to clients. “Naturally, compliance by both OPEC and non-OPEC members will be essential, otherwise the market will likely remain in oversupply to at least” the third quarter.
