Pour Oil on Troubled Waters | 19th January 2015

There is no reason to think the oil prices will not go down further given the current state of affairs. We are entering unchartered territory and, looking at our estimates, it is very likely that the price of crude will bottom out at $40. Indeed, most commentators point squarely at supply (or over supply) rather than demand deficiency as a main driver for the spiralling prices.

Whilst the US remains the largest producer (and consumer) of crude, in terms of international trade, Saudi Arabia was the largest exporter of crude in 2014 and is forecast to reign at the top spot in 2015. Delta Economics forecasts world crude exports to take a hit in 2015 with a -1.28% reduction in exports on the previous year (2014). As global demand continues to dampen because of weak economic activity, oil exporters such as Saudi Arabia are responding by slashing prices to the EU and US yet increasing them to Asia. This is understandable given the inelastic nature of crude. Indeed it seems Saudi Arabia is more willing (and able) to absorb potential losses because it accumulated a generous buffer when prices were high. Qatar and Kuwait, too, are better poised than producers such as Venezuela, Iran and Russia, all of whom are experiencing budgetary strains – some small (Russia), some large (Iran), with one, Venezuela, facing imminent default unless China, the largest crude importer, steps in to negotiate some kind of agreement. OPEC nations agreed last month to maintain production at their usual level, whilst non-OPEC producing nations have stoked up their capabilities, which helps drive down the price of crude even further.

The Shale Revolution on the other hand is helping the US wean itself off its dependency on international crude. However, as reports have shown, the extraction of Shale is only viable if oil prices remain high: lower prices are only adding pressure to Shale producers’ business model. But let’s not forget that lower oil prices are also great news for the largest importers of oil such as US, India, China and the EU, all of whom are experiencing an unintended windfall that is likely to be passed on to the consumer in the months to come.

 

 2015-01-19_CommentsAnalysis_009_fig01


Figure 1
 |  Pour Oil on Troubled Waters
Source  |  DeltaMetrics 2015

 

Pour Oil on Troubled Waters  |  Author  |  Shefali Enaker  |  Economist