Daily Management Review

Crude oil futures- sustained oil price not happening anytime soon.


06/02/2015


While considering Brent and WTI crude futures, the current price scenario is unlikely to change until and unless any impactful event of global proportions rattles the absence of flux in the crude market. Supply and demand are now not the only factors involved in the pricing of crude oil.



It’s important to wake up to the fact that the general trend of oil future standards have been imagined as sort of a go-by venture and at the same time, if it is so then it is quite evident now that an oil price rally is not going to materialize without a prior indication of supply chain response. One notable aspect is that industry experts to casual watchers are all sending out mixed vibes about the type of market movement crude futures are experiencing currently from - slow, to gradual to none at all.

First-hand reports from a number of commentators that have been monitoring the situation, have been speculating for some months now that the US Shale Oil production is gullible to suffering a period of low pricing which in turn is set to trigger a supply correction and an upsurge in the pricing of the commodity.
The partial decline in the output rates of US Shale is being counterbalanced by an acute increase in the production in other places, especially in Saudi Arabia, Kuwait and the regions of United Arab Emirates. Organization of the Petroleum Exporting countries (OPEC) has estimated supply of nearly a billion barrels on a daily basis. Even though people look for conspiracy theories about this specific money driven industry still nothing can be taken word for word as sadly OPEC has lost its once strong standing in the current markets regardless of the fact they still have considerable resources.

On the contrary it can also be presumed as a true fact that the demands haven’t been really taken a turn for the high ranges as nearly as 1.3million bpd of surplus crude oil keeps coming on to the market. Surplus Oil in itself accounts for a geopolitical risk now with oil supplying countries like Iran, Nigeria, South Sudan and Libya at turmoil on an unimaginable scale. This is more likely to result in a serious and daunting geopolitical infraction resulting in a hike from 500 to 600k bpd range. The turnaround from this surplus oil state can presumably result into tragic ends from humane point of view. Taking into account the ongoing oversupply scenario and also bland state of oil futures, it isn’t likely to be anywhere near to being an asset towards meaningful geopolitical development.

Secondly, of the big five oil consumers – India, US, China, South Korea and Japan – only India’s demand is anything worth mentioning about. Emerging market demand for crude oil should go up steadily this year but won’t spike erratically, as verifiable evidence points to refinery capacity utilization in many Asia Pacific markets falling from the standards of even what they used to be a mere 18 months ago.
 
Thirdly, crude oil price remaining in the aforementioned range paradoxically doesn’t hurt very many major producers; especially US shale players. US shale players need WTI prices to average at least $50 to maintain production level on a net basis; however some are managing to do so even at $35. Whereas Brent should trade above $60 with a gradual upwards climb.
 
Finally, at current consumption levels, if a surge above $75 were to happen, it is bound to bring more oil on to the market serving as a drag on the price. Conversely, a sustained dip below $30 will cause a supply-side correction supporting price. Neither scenario is much likely in the near future.

In the absence of a breakthrough moment, be it a demand surge or geopolitical flashpoint of global impact; the so called supply-side correction in terms will remain slippery over the next six months at the very least. Conditions are unlikely to change the range we are currently stuck in.
 
References:
http://www.forbes.com/sites/gauravsharma/2015/05/15/sustained-oil-price-rally-wont-materialize-anytime-soon/
http://www.forbes.com/sites/gauravsharma/2015/05/15/sustained-oil-price-rally-wont-materialize-anytime-soon/2/   







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