We all have always been wondering how exactly do the oil prices react or move based on global sentiments and for what we all say “ye global gyan se oil prices pe kaisa effect padta hai??”.Well this is how it probably does. This is how I am analyzing it to be, the conditions today and the way forward.
Whats currently being going on is the ongoing deal discussions between the US and Iran. Well I will focus on that at the end of this one. Lets talk about what is been happening in the US lately. First and foremost thing is the reduction in the rig counts. Now what does this rig counts mean is the number of drilling rigs actively exploring or extracting oil or natural gas. Note here that Baker Hughes (the US giant which maintains the data on oil production) only counts the active rigs. This reduction in the rigs is the sentiment causing to believe that the oil production in US has slightly come down and that kinda explains the reason why the oil prices have jumped back to “$55 ish” recently. Apart from this the upward pressure is due to the weather conditions in Iran and the violent situation in Libya. Although the price did not suddenly spike up despite rig count reduction, because US was trying to optimally product maximum amount from their most productive wells. But recently Baker Hughes reported another reduction in the rig count, which definitely started affecting the supply and prices started inching up with time. On the other hand, US has its highest inventory of shale oil in the past 33 years, EOG Resources being the largest shale oil producer. Oh and yes we cant forget the invisible shale oil inventory though, estimates are that still companies have left 3000 wells untapped. That is a huge amount of inventory eh?? So we can actually not expect much demand from US for a while I must say.
The reason currently this serious and weirdest upward pressure is also because of the Saudi attacks on Yemen. Although Yemen is not a significant producer of oil, next to it passes the fourth busiest oil shipping bottleneck. Any guesses on that shipping bottleneck?? 😉 Yemen lies on one side of Bab el-Mandeb ( the fourth busiest oil shipping bottleneck I was talking about volume wise)
China, Japan’s recession (waat lag gayi hai boss unki toh) and the Euro Zone all showing slowdown, although ECB Chairman claims that Euro Zone is revamping and the QE is working for them as such. Naturally the demand from those countries is going to be subdued for at least the following two quarters I suppose. China has just last night reported a GDP growth of 7%, the lowest since 2008.
And what to say about the OPEC countries. (*sigh*). They are in the condition to sell at whatever the hell price they can sell it at so no supply curtailing from them very soon.
Ah finally the most happening thing in the oil markets, the US IRAN nuclear deal. The agreement, which is aimed at curbing Iran’s nuclear program in return for the lifting of economic sanctions on the country, is to be finalized by June 30. If this deal is finalised then Iran is expected to pump up its production by the end of the next quarter thus increasing the supply in the markets again.
The way forward:
Oil markets has been a game of demand supply dynamics and some absolutely political moves by these middle east countries. But anyway going forward the demand for oil is expected to increase for a month or so since the US maintenance season is going on, rather to be precise US will be back with its refineries producing by May end. Although in the short term we are unlikely to expect a sharp rise in the prices due to oversupply but in the long term oil will likely come back to around $75-80 levels. As far as India is considered, we are having a fantastic time with the oil prices staying low for a while (especially Mr. Finance Minister in meeting in petrol subsidies for the year :P). And I guess that is why MoF is also targeting for the Capital Account Convertibility with oil prices being favourable. Fingers crossed. Every time we have thought of Capital Account Convertibility a crisis has occurred. Hope RBI and the MoF implement it at the right time and with the most reliable economic conditions in place. 🙂