Understanding Benchmark Oils: Brent Blend, WTI and Dubai or middle east produced by OPEC nations and their price behavior:
Here these oils are varied on the basis of the quality produced. There sweetness, Sulphur content and density. Quality grade is Brent oil > wti (West Texas Intermediate) oil > opec/middle east oil.
Even though they are varied but then also they are having approximately same cost. They are similarly affected by the market fluctuations/ demands or global crisis.
It is worthy to be noticed that even quality of opec produced oil is inferior, then also the market share is 81%
The world consumes about 76 million barrels per day of oil and OPEC accounts for nearly 60% of world’s proven oil reserves & its exports represent 55% of the oil traded internationally.
There is a general concept in the ECONOMICS that the Price elasticity of demand is always thought of as negative - that is demand falls by a certain percentage for a certain percentage price rise of some factor input, in this case oil price rises will necessarily cut oil demand and will lead to decrease in flow of capital and thus will result in reduction in economic growth.
‘For the past few days there is a noise in the global market that oil prices have fallen sharply over the past few months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less’.
Global oil prices have dropped to their lowest levels in years, plunging by more than 25 percent in the past five months. Slowing growth in Europe and China is drying up demand, all while production is soaring in the United States and Libya, creating a supply glut. With both of these trends unlikely to change in the coming months, analysts say that lower crude prices could last well into 2015. Let us now get into the depth of the topic! Why is it happening and who all are responsible for this mess!!!
Major oil producers:
OPEC nations: this is a group of 12 nations which was formed in the year 1960. Founding members are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela which were joined by Qatar (1961), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Angola (2007) in the later phase.
USA (as a shell oil producer): The Eagle Ford Shale Play in Texas, Eagleville and Briscoe Ranch (at the top since 2009). While Prudhoe Bay Field in Alaska is third now (the largest U.S. oil field in 2009)
Russia: Most of Russia’s oil production originates in West Siberia and the Urals-Volga regions
UK: The Forties Oil Field is the largest oil field in the North Sea (major source of BRENT OIL)
The various Oil price determinants are as follows:
Productions
Demands
Inventory
Speculations
Why oil prices are falling:
RUSSIA: Russia is the third largest crude oil producer after USA and SAUDI ARAB and its 70% of incomes is through export of oil and gas. Due to global economic instability(
dramatic interest rate hike to 17%) oil demand has declined and also ROUBLE is also facing problem against DOLLAR. Moreover, western and US sanction on RUSSIA due to its support for separatists in eastern Ukraine have hit the country hard. Thus Russia has confirmed it will not cut production to shore up oil prices.
"If we cut, the importer countries will increase their production and this will mean a loss of our niche market," said Energy Minister Alexander Novak.
SAUDI ARAB: Saudi Arabia, the world's largest oil exporter and Opec's most influential member. They are still producing and maintaining the large chunk of oil even after huge price drop in crude oil because they are presuming USA as a threat for the market and perhaps to put the US's burgeoning shale oil and gas industry under pressure
Other Opec members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for maneuver.
USA: there has been a change in the economic growth strategy, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, it is acting as the main drivers of lower oil prices.
CHINA CRISIS: due to economic slowdown in China the demand of the crude oil has dipped but supply is still at the higher end. Thus prices are still falling.
ISIS: The capture of the Ain Zalah oil field will enable them better funding to launch an offensive for one of Iraq’s largest oil fields- the Kirkuk oil field.it is well known that ISIS is making up to
$1 million per day by selling Iraqi crude oil —$30 USD per barrel — which is below the market price of ~$100 USD per barrel.
IRAN western sanctions withdrawal: Iran agreed to discontinue its nuclear program for next ten years, for which all US sanctions against Iran have been withdrawn. Earlier U.S. sanctions initially targeted
oil, gas and petrochemicals industry, exports of refined petroleum products, This encompasses
banking and insurance transactions (including with the
Central Bank of Iran),
shipping, IT services for commercial endeavors
Return of LIBYA: Restarting crude oil production in LIBYA after the civil war broke out in 2011 which led to bloodshed and finally a
multinational coalition led by
NATO forces intervened, various ban were imposed on oil exploring fields, which were finally lifted in April 2014. This also increased the oil production.
BRAZIL: Petrobras has
nearly tripled production in 2012. Brazilian leaders targeted for supply surge to boost profits, pay off debts and fund.
Mexico: approved a sweeping package of measures to allow private and foreign firms to explore for and produce energy in Mexico in 2012.
Production through the CANADIAN OIL SANDS (most costly) increased the supply.
Civil war in Syria started in March 2011 decreased the production.
Time line:
| Period |
Previous price($)/barrel |
New price($)/barrel |
Event |
| 1979-80 |
35.5 |
29.04 |
An executive order was signed to remove control over market to increase the productivity in USA |
| 1984-85 |
28.1 |
27.8 |
OPEC (Saudi Arab) reduced the production from 30 million bpd to 18 million bpd to maintain market price. |
| 1986 |
27 |
13.5 |
Saudi Arab increased its production to take back its lost market. Price fell to even $7 |
| 1990 |
17.3 |
22.6 |
War was declared on Kuwait by Iraq , resulted into economic slowdown |
| 1991 |
22.6 |
18.6 |
Again production was resumed after intervention of USA/UK/France |
| 1997 |
18.86 |
12.28 |
Asian crisis |
| 2000-01 |
27.6 |
23.12 |
Dot Com bubble and air attack on twin tower USA |
| 2002 |
24.36 |
28.1 |
Growth rate in CHINA increased thus demand increased many a times |
| 2008 |
94.1 |
60.86 |
Housing bubble in USA |
| 2011 |
74.7 |
107 |
Civil war was declared in LIBYA and Syria |
| 2014 |
105.8 |
96.2 |
Libya again started its production and supply increased |
| 2015 |
96.2 |
44 |
China economic crisis and Iran sanction withdrawal |
Battle of pride: survival of the fittest (USA versus SAUDI ARAB and RUSSIA)
There is a new theory that the US is willing to see oil prices low to undermine Vladimir Putin’s ambitions in eastern Europe, put pressure on
Iran and spur a global economy desperately in need of cheap energy. This has helped US as, each $10-per-barrel drop in the price of oil boosts GDP by 0.1%, according to Swiss investment bank UBS. The US imposed a sanction on RUSSIA which affected many. In July the US included more Russian businesses, further it targeted the biggest Russian bank defense conglomerate, finally bought Russia on the state of recession.
But on the other hand OPEC member IRAQ also planned something to drive USA out of the market, as oil prices have reduced 55 per cent and US Henry Hub gas prices have dropped 45 per cent in the past 12 months. If Opec does drive shale out of the market, it could then increase prices by cutting production.
Effect of price fall on economies:
Exporter:
For net oil-exporting countries, GDP increases through higher export earnings The danger for these nations is that if prices go too high, and stay high, GDP will fall in the importing nations, reducing the demand and price of oil.
Importer:
The direct effect of a given oil price increase for importer countries is an income loss. This loss in income depends on the oil-intensity of production and the degree to which the demand for oil is price inelastic Then if oil product prices rise, and consumers are unable or unwilling to reduce oil product consumption, consumers may reduce expenditures on other goods and services, potentially slowing the rate of GDP growth.
The Adjustment effect:
Oil is having its impact on the industry depending on oil products, the negative revenue effects would initially be borne by producers in a competitive market,
O poor I am suffering…
Countries whose revenues come mostly from oil -- such as
Venezuela, budget deficit worth nearly 17 percent of its gross domestic product last year.
Iran:
Western sanctions were imposed for Tehran’s nuclear program, which has greatly reduced the country’s ability to export oil, and revenues are down nearly 50 percent since 2012 isolation from the international banking system, finally the RIAL, lost two-thirds of its value against the US dollar and caused inflation to rise to more than 40%, with prices of basic foodstuffs and fuel soaring.
As a result, Iran's oil exports had fallen to 700,000 barrels per day (bpd) by May 2013, compared with an average 2.2 million bpd in 2011
On Iran USA imposed sanctions on 2006 while EU imposed on 2012.
Nigeria:
95 percent of the country’s foreign exchange earnings and 85 percent of its total revenues coming from crude oil sales and is struggling to pay off debts.
Ecuador and Algeria all risk sliding into economic recession if oil prices continue to drop
Brazil:
But for each $1 drop in crude oil prices, Petrobras stands to lose more than $900 million of cash from potential oil sales,
Mexico:
Pemex’s quarterly loss totaled
$4.4 billion from July to September, compared to nearly $3 billion for the same period in 2013
Russia:
Since Russia's annexation of Crimea in March the EU and US have imposed various sanctions, They have
blacklisted dozens of senior Russian officials and firms.
Russian companies that borrowed from western banks are also in trouble. The corporate sector requested the west for cheap credit and they have to pay the debts even when ROUBAL stumbled against DOLLAR. Moreover, demand has decreased thus growth has decreased.
UK: Here oil price has decreased because no new oil reserve has been discovered and also oil price has decreased. Moreover, anything less than 60$ is loss.
Benefit for:
Falling oil prices is good news for oil importers, such as Western Europe, China, India and Japan
USA:
net positive effect from declining oil prices, that could be further reinforced in an environment of improving labor markets and rising consumer confidence.
CHINA:
Couple of decades ago negotiations held between CHINA and RUSSIA for oil supply (1990s) but RUSSIA was stringent enough in its demands, but finally RUSSIA agreed to supply gas to China at prices much closer to Beijing's liking than its own. Tumbling oil prices further widened the gap between these countries because China is the largest importer of oil and gas and RUSSIA was looking for a market. the 45 percent annual average decline in oil prices in 2015 is expected to widen the current account surplus by some 0.5-0.9 percentage point of GDP
Impact on Indian economy:
It helped INDIA to increase its GDP as it imports 75% of oil consumption and currently has a large current account deficit. Inflation trends down, due to lower fuel expenses. Subsidies reduce.
Rs 72,300 crore in 2014-15, from Rs 1,40,000 crore in 2013-14. The 2015-16 Budget assumes Rs 30,000 crore on this account and also private refiners like Reliance and Essar considered for a re-entry in the domestic retail market. The sectors that will have a positive impact due to
falling oil prices directly as well as indirectly will be a) automobiles, (b) plastic industries including pipes, (c) chemicals and resins selectively, (d) paints, (e) footwear manufacturers etc.
Impact on Europe:
Usually falling oil prices would be welcomed by oil importing countries as imports of crude oil from non-EU countries represent almost 3 percent of nominal GDP. But the biggest fear in Europe at the moment is the
deflation in ‘Japan style’ last decade. EU inflation has fallen to a five year low (0.4% in
August 2014) 31% of Eurozone goods are now falling in price.
The major countries whose production influenced the global economy and are having major role in deciding the supply demand curve of the crude oil throughout the globe.
| Table: Total Oil Supply (Thousand Barrels Per Day) |
| |
|
|
|
|
|
|
|
|
|
| |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
| |
|
|
|
|
|
|
|
|
| United States |
8324.942 |
8316.323 |
8469.403 |
8563.926 |
9130.085 |
9695.589 |
10128.47 |
11118.69 |
12342.77 |
| Europe |
6166.141 |
5777.222 |
5445.433 |
5224.417 |
4983.423 |
4656.552 |
4299.843 |
3988.661 |
3812.733 |
| UK (Offshore) |
1770.9 |
1602.142 |
1601.799 |
1502.864 |
1422.145 |
1318.737 |
1084.068 |
922.3808 |
827.3068 |
| Iran |
4238.584 |
4149.34 |
4039.025 |
4177.537 |
4178.296 |
4243.073 |
4213.968 |
3517.817 |
3192.37 |
| Iraq |
1889.419 |
2009.441 |
2096.636 |
2384.553 |
2399.167 |
2402.876 |
2628.993 |
2986.641 |
3057.692 |
| Qatar |
1253.606 |
1283.664 |
1350.867 |
1484.263 |
1573.248 |
1787.899 |
1936.395 |
2032.611 |
2067.299 |
| Saudi Arabia |
11496.31 |
11098.44 |
10748.62 |
11428.6 |
10314.71 |
10908.35 |
11466.71 |
11840.68 |
11701.51 |
| Syria |
463.794 |
438.8272 |
411.8702 |
400.35 |
400.1077 |
420.571 |
373.6724 |
170.5266 |
75.11896 |
| UAE |
2844.626 |
2948.469 |
2947.497 |
3046.873 |
2794.552 |
2813.244 |
3213.766 |
3398.194 |
3440.588 |
| Libya |
1721.293 |
1809.577 |
1844.703 |
1874.442 |
1790.109 |
1789.11 |
501.466 |
1483.044 |
983.6167 |
| World |
85101.22 |
85153.03 |
85167.47 |
86569.89 |
85738.8 |
88116.56 |
88536.23 |
90461.56 |
90904.17 |
Conclusion:
The decline in oil prices has significant macroeconomic, financial and policy implications. If sustained, it will support growth and reduce inflationary, external, and fiscal pressures in a large number of oil-importing countries. On the other hand, sharply lower oil prices will weaken fiscal and external positions and reduce economic activity in a few oil-exporting countries. including oil, tend to be volatile, making forecasting prone to errors. For oil, the unpredictability is further amplified by the possibility of heightened geopolitical tensions and a sudden change in expectations regarding OPEC’s policy objectives.