• Crude Oil Prices: Why A Sustained Rebound May Still Be Further Ahead

    Global crude oil prices have recovered somewhat ― even if tenuously ― from the lows of just a few weeks ago, but they are still only about 30% of their values for the same period two years ago.

    While it is unclear just how long it will last, the low oil price regime has failed to bring any significant growth to the global economy and has left many producing companies struggling with dwindling revenues, even bankruptcy. In addition, the often-observed correlation between oil prices and share prices only adds to current market uncertainties.

    Spot Crude Oil Prices

    The current low oil price regime is driven in the main, by a lingering oil imbalance ― excess of supply over demand ― and a sluggish global economy.

    Oil Imbalance

    Facing substantial loss of market share due to the tight oil boom (mainly U.S. shale oil and to some extent Canadian tar sands), major producing countries such as Saudi Arabia and Russia, which have lower production costs also turned on the spigots to their massive oil casks. The result has been the current supply overhang, which is being exacerbated by Iran’s insistence ― after her recent emergence from a restrictive sanctions regime ― on speedily attaining her pre-sanctions production level.

    The global oil imbalance has been on an upward trajectory since 1Q 2014. It is informative that this positive imbalance is not driven by falling demand but by the growth in supply superseding that in demand. Unless this differential growth rate is properly addressed, that imbalance, and therefore the low oil price regime will linger. Continue reading  Post ID 458



  • Crude Oil Prices And The Lingering Uncertainty

    Crude oil prices have plummeted by more than 70% over the past 20 months, to twelve-year lows. The impact on both producing companies and countries has been significant. Major oil and gas companies have seen large dips in profits. In 2015, BP suffered its largest annual loss in two decades while ExxonMobil, Royal Dutch Shell and Chevron had 50%, 80% and 76% decline in earnings respectively, for the same period. ConocoPhillips cut its dividend by about 66%. Revenues for members of Organization of the Petroleum Exporting Countries, OPEC, are expected to slump to about US$400 billion from US$1.2 trillion in 2012. Azerbaijan and Nigeria are mooting emergency loans from the International Monetary Fund, IMF, while many analysts are expecting a Venezuelan default on her foreign debt. Even Saudi Arabia’s fiscal reserves fell to a four-year low last year.

    Market Uncertainty

    While the current turmoil in the global economy derives from concerns about the health of the global economy, the impact of oil prices contributes in no small measure. As China, a major energy ― especially oil ― consumer transitions from an emerging market to a developed one, a marked reduction in her growth rate may be the new order. During her years of steep economic growth, China was an export destination for commodities from countries such as Russia, Brazil, Chile and Nigeria among many others.  The downturn has meant falling demand for these commodities and with falling oil demand has come falling oil prices. The current capital flight estimated at tens of billions of dollars per day, is a testament to the country’s influence on global markets.

    S&P 500 vs S&P 500 Energy

    While the shale producers in the United States have shown unexpected resilience in the face of low oil prices, it is doubtful if the debt-ridden operators can sustain operations at current crude oil prices. WTI (CL1:COM) closed US$27.32 on Thursday. Continue reading  Post ID 449



  • A Window On Crude Oil Prices

    Driven by a massive and lingering imbalance ― excess of supply over demand ― global crude oil prices have fallen by more than 60% Spot Crude Oil Pricessince mid-2014 to multi-year lows, and the impact has been significant. Producing companies have deferred or even cancelled development projects worth billions of dollars and industry job losses are estimated to be about 200,000 with more expected. Once-bustling oil patch communities have become near-ghost towns. Corporate profits among the oil majors slumped as much as 64% year-on-year; some upstream companies have filed for bankruptcy and both banks and investors that are exposed to them have been impacted.

    Going forward, certain critical issues will likely define global oil prices.

    Fundamentals

    The International Energy Agency, IEA, recently reported a massive global crude oil inventory of about 3 billion barrels. Estimates of the current global crude oil imbalance range from 1.5 million barrels per day (MMbpd) to 3 MMbpd. According to the Organization of the Petroleum Exporting Countries, OPEC, that value is about 2 MMbpd. With increasing supply and a sluggish growth in demand, there is at present, no real indication that the widening imbalance will be reversed any time soon. Global crude oil prices therefore, baring incidental effects, will likely remain low in the near term. Continue reading  Post ID 436