What Is Keeping The Oil Prices Low

While the final two years altogether have already been a volatile period for oil prices globally, they have been 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 prices have fallen by about 70% from June 2014 peak prices. Interestingly though, the supply side players usually do not look like 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's really going on with the oil industry?

Drivers of oil prices

Like any other commodity, crude oil is also subject to demand-supply dynamics. To put it simply, when production rises or demand goes down, the global prices fall. But that is not the finish of the story. The market players fully appreciate the way the current global economy is dependent upon this fossil fuel and this gives rise to speculation. Oil prices are set at the major exchanges, ICE Futures in London (Brent) and Nymex in New York (WTI), which include a large share of speculative push. It's estimated that more than 50% of oil prices we see today is pure speculation! The major chunk of the derivatives market is driven by way of a handful of global banking giants and therefore, system runs heavily on market sentiments. The costs so determined form the foundation of crude oil pricing in international markets. Many oil producers utilize the Brent.

The Slump

When there is a positive sentiment around demand and offer 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 increases the rally.

The current slump is largely attributed to the likelihood of a plunge in future demand and existing oversupply on the market. Some of the big consumers, such as China, are grappling with an impending slowdown. Bad news is trickling from another corners as well. On the flip side, today's industry scenario is marked with intense competition between oil producing companies. Many people are eyeing a more impressive share in the pie even though this means stretching beyond the resources for the time being. It's a no-brainer a cut in production could have a salutary influence on the prices, however the individual producers and OPEC are playing the waiting game to see who yields first. Unless there exists a consensus, this can be a high probability that those that reduce their production will lose market share to those who usually do not follow the suit. According to OPEC President Emmanuel Ibe Kachikwu, "We just felt comfortable to wait and watch." The group believes that a good 5% cut is not going to 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 customers are rejoicing. However the gravity of the situation on another end can be understood by the fact that the oil industry has lost some 250,000 jobs worldwide (Source: New York Times). The wait watching policy will never be sustainable for the marketplace players and economies of the oil producing nations as a whole. While the big energy companies are feeling the pinch, some smaller players across the value chain have previously gone under.

It is difficult to predict concerning how long this stalemate will remain, but most analysts are of the view that if this trend continues for long it might have a ripple effect 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 research services have a worldwide reach with focus on equity research, analysis, modeling, valuations and financial writing. The consulting services in India primarily focus on the startup and SME sectors. Swati also works being an outside consultant (Management Roles), latest being with one of the biggest credit cards MNC. Please feel absolve to get in touch for just about any business requirements. Visit [1]