Oil may sink again - US Production to hit Russia and Saudi Arabia

Author : Ajay Kumar Chairman Fox Petroleum

With each passing year, oil seems to play an even greater role in the global economy. I stated in my speech in International LNG Summit Organised by InfralineEnergy, “ The Crude price will bump to some extent in nearly end of March and will continue to slip between USD $ 40 -50 per Barrel. It is a sign of positive sentiments for this sector; It is upto the players how they will maintain cool in Oil market getting hot again; Mostly it depends on two type of future traders – Hedgers and Speculators; An example of a hedger would be an airline buying oil futures to guard against potential rising prices. An example of a speculator would be someone who is just guessing the price direction and has no intention of actually buying the product.

Unlike most products, oil prices are not determined entirely by supply, demand and market sentiment toward the physical product. Rather, supply, demand and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination. Cyclical trends in the commodities market may also play a role. Regardless of how the price is ultimately determined, based on its use in fuels and countless consumer goods, it appears that oil will continue to be in high demand for the foreseeable future.

The big question is what oil prices will do in 2015-16. Oil prices are unsustainably low right now – many high-cost oil producers and oil-producing regions are currently operating in the red. That may work in the short-term, but over the medium and long-term, companies will be forced out of the market, precipitating a price rise. The big question is when they will rise, and by how much. So, what does that mean for oil prices in 2016? It is anybody’s guess, but here are the top five variables that will determine the trajectory of oil prices over the next 12 months, in no particular order.

Variable 01: China signed the world biggest Oil/Gas Deal in the past three years; China’s Economy is one of the variable . China is the second largest consumer of oil in the world and surpassed the United States as the largest importer of liquid fuels in late 2013, whereas United States planned to cut imports. More importantly for oil prices, China is expected burn through 3 million more barrels per day in 2020 compared to 2012; But China’s Economy is in suspicion, so the Oil market is. 

Variable 02: American shale gas invention and production. Till end of 2014, the U.S. was producing more than 9 million barrels of oil per day, almost double of the production from 2007. That stock send oil prices to the dumps in 2014 and it is still under construction. Self goal by United States has put US Oil market in danger. Rig counts continue to fall, spending is being slashed, but output has so far been stable. Whether the industry can maintain output given today’s prices or production begins to fall will have an enormous impact on international supplies, and as a result, prices. And, many other factors, which involves, United States game plan change in Arab;

Variable 03: The significant role of Elasticity of Demand. The cure for low prices is low prices. Which is supposed to create more buyers, but market has not seen such trend, only few iregulated buyers nad Government are the players; Low prices could spark higher demand, which in turn could send oil prices back up has not given that much of enthusiasm in the market; But although, it has played a big role in price fixation;

Variable 04: OPEC is clear cut a game changer, but it all depends on its action and its direction. OPEC deserves a lot of credit (or blame) for the remarkable downturn in oil prices last year but as we see only OPEC not to be blamed but OPEC may turn correction in pricing of oil in weeks that has not been done. For now OPEC – or, more accurately, Saudi Arabia – has stood firm in its insistence not to cut production quotas. Whether that remains true through 2015 is up in the air. There is nothing to blame Saudi Arabia, when it comes to OPEC;

Variable 05: Geopolitical events and accidents. United States cut down investment in Arab oil sector was an accident, and lifting ban from Iran was an event; But, overall result goes to ZERO because both the accident and event will take time to determine the Oil & Gas Market. In the not too distant past, a small supply disruption would send oil prices skyward. In early 2014, for example, violence in Libya blocked oil exports, contributing to a rise in oil prices. In Iraq, ISIS overran parts of the country and oil prices shot up on fears of supply outages. But since then, geopolitical flashpoints have had much less of an effect on the price of crude. During the last few weeks of 2015, violence flared up again in Libya. But after a brief increase in prices, the markets shrugged off the event. Nevertheless, history has demonstrated time and again that geopolitical crises are some of the most powerful short-term movers of oil prices. Geopolitics has not that big role to play in market but considered in Oil & Gas it has played big role;

If you want a love message to be heard, it has got to be sent out. To keep a lamp burning, we have to keep putting oil in it.