WHATS Keeping The Oil Prices Low

While the last two years altogether have already been a volatile period for oil prices globally, they are in a free fall because the last quarter of 2015. Benchmark Brent closed at $33.10, while WTI closed at $32.30 on last Wednesday, January 27. The costs have fallen by about 70% from June 2014 peak prices. Interestingly though, the supply side players usually do not seem to be relenting anytime sooner. In fact, analysts expect that the production is going to upsurge in near term, pushing the prices down even further. So, what is really going on with the oil industry?

Drivers of oil prices

Like any commodity, crude oil is also at the mercy of demand-supply dynamics. Simply put, when production rises or demand falls, the global prices fall. But that is not the finish of the story. The marketplace players fully appreciate how the current global economy is dependent upon this fossil fuel which gives rise to speculation. Oil prices are set at the major exchanges, ICE Futures in London (Brent) and Nymex in NY (WTI), which include a big share of speculative push. It is estimated that well over 50% of oil prices we see today is pure speculation! The major chunk of the derivatives market is driven by a handful of global banking giants and therefore, system runs heavily on market sentiments. The prices so determined form the basis of crude oil pricing in international markets. Many oil producers use the Brent.

The Slump

When t here is a positive sentiment around demand and supply of crude oil, the big bankers take huge future positions in expectation of speculative gains. This plays an important role in pumping prices, which in turn, attracts greater market activity trading and adds to the rally.

The current slump is basically attributed to the probability of a plunge in future demand and existing oversupply in the market. A number of the big consumers, such as for example China, are grappling with an impending slowdown. Bad news is trickling from the other corners as well. On the other hand, the present industry scenario is marked with intense competition between oil producing companies. Everyone is eyeing a bigger share in the pie even though it means stretching beyond the resources for the moment. It's a no-brainer that a cut in production will have a salutary influence on the prices, but the individual producers and OPEC are playing the waiting game to see who yields first. Unless there exists a consensus, it is just a high probability that those who reduce their production will lose market share to those that do not follow the suit. According to OPEC President Emmanuel Ibe Kachikwu, "We just felt comfortable to wait watching." The group believes that even a 5% cut won't have much impact and is blaming shale oil for the fiasco. To increase an already complex situation, with the lifting of economic sanctions, Iran will soon amp up its production.

The Impact

Obviously, the importers and end users are rejoicing. However the gravity of the problem on another end can be understood by the fact that the oil industry has lost some 250,000 jobs worldwide (Source: New York Times). check here and watch policy will never be sustainable for the market players and economies of the oil producing nations all together. As check here are feeling the pinch, some smaller players across the value chain have already gone under.

It really is difficult to predict as to just how long this stalemate will stay, but most analysts are of the view that if this trend continues for long it could have a ripple influence on the world economy.

Swati is really a qualified Indian Chartered Accountant (CPA) and a Post Graduate in Commerce with 12 years of experience. She actually is the founder of Eurion Constellation, a consultancy and research firm catering to businesses in U.S., Europe and India. The study services have a global reach with concentrate on equity research, analysis, modeling, valuations and financial writing. The consulting services in India primarily concentrate on the startup and SME sectors. Swati also works as an outside consultant (Management Roles), latest being with one of the primary bank cards MNC. Please feel free to get in touch for any business requirements. Visit [1]