Notes

What Is Keeping The Oil Prices Low?
While the final two years altogether have been a volatile period for oil prices globally, they have been in a free fall since 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. Actually, analysts expect that the production is going to increase in near term, pushing the costs down even more. So, what's really going on with the oil industry?

Drivers of oil prices

Like any other commodity, crude oil can be subject to demand-supply dynamics. To put it simply, when production rises or demand goes down, the global prices fall. But that's not the finish of the story. get more info appreciate how the current global economy depends 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 NY (WTI), which include a big share of speculative push. It is 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 for that reason, system runs heavily on market sentiments. The prices so determined form the basis of crude oil pricing in international markets. Many oil producers utilize the Brent.

The Slump

When there is a confident sentiment around demand and offer of crude oil, the big bankers take huge future positions in expectation of speculative gains. This plays a significant role in pumping prices, which, attracts greater market activity trading and increases the rally.

The current slump is basically attributed to the probability 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 the other 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 it means stretching beyond the resources for the moment. It's a no-brainer a cut in production will have a salutary influence on the prices, however the individual producers and OPEC are playing the waiting game to see who yields first. Unless t here is a consensus, this can be a high probability that those that reduce their production will lose market share to those who 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 won't have much impact and is blaming shale oil for the fiasco. To add to 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. But the gravity of the problem on the other end can be understood by the truth 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 market players and economies of the oil producing nations all together. While the big energy companies are feeling the pinch, some smaller players across the value chain have already gone under.

It is difficult to predict concerning how long this stalemate will stay, but most analysts are of the view that when this trend continues for long it might have a ripple effect on the world economy.

Swati is a qualified Indian Chartered Accountant (CPA) and a Post Graduate in Commerce with 12 years of experience. She 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 global reach with focus 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), most recent being with one of the primary bank cards MNC. Please feel absolve to get in touch for any business requirements. Visit [http://www.eurionconstellation.com]
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