CRUDE SHOCK AND ITS FORWARD OUTLOOK

The Doha Meet

 

Geopolitical shock-waves travelled beyond the borders of the Middle East last Sunday when OPEC members failed to contain the CRUDE CRISIS at their Doha meeting. The mood at the much awaited meet was dampened by the absence of Iran one of the key members of OPEC. Global Oil markets were hoping that OPEC members including Iran would stabilize the excessive volatility in the commodity’s price by capping the net output. Oil prices, however dropped to $38.75 / barrel on Monday post the failed meeting and later closed at 39.78 on news of labour strikes in Kuwait’s Oil fields.

 

Behind The Veil Of The Demand Supply Story

 

Beyond the fall in demand lies a bigger politics in play that led to the decline in the commodity price. To make matters worse, The United States lifted sanctions imposed on Iran on January 18th this year resulting in an increase in production by 300,000 barrels per day. The energy sector already reeling under pressure suffered a massive blow when Iran promised to flood the markets with CRUDE OIL cheaper than Saudi Arabia’s Aramco. Even the Saudi Oil Industry was not spared in the run up to the lifting of the sanctions. The Tadawul Index fell 22 % from 6975 to 5397 between Jan 3rd to Jan 18th. The after effects rippled far and wide and weakened the Russian Ruble by 24% which climbed from a low of 69.23 on the 29th of Dec 2015 to trade at the highs of 85.95 on Jan 21st. In the midst of speculations Saudi Arabia decided to impose taxes on its citizens, thereby raise an extra $100 billion a year and balance the budget in the long run.

 

It Could Get Worse If Things Don’t Improve

 

The future of Oil does not look promising as the oversupplied environment exert pressure on the Crude market and cause margins to weaken. The US economy has majorly been supported by improvements in the labour markets while low Oil prices continue to impact the industrial production. Low Crude prices over a longer period will also lead to a fall in investments in the energy sector. Such adverse consequences could weigh heavily on the US and its growth numbers this year.Countries like Brazil and Russia could be facing a second year of recession. For several developing countries the significant fall in Crude prices could add to further stress and financial instability.

 

What are the Odds Of Recovery

 

Going forward crude oil prices could see a sharp recovery if global markets are supported by a weak dollar and a flatter path in the FED’s interest rate trajectory. Further possibilities of growth could also be spurred should the People’s Bank Of China support the Yuan or a breakthrough in potential coordination amongst Major Oil Suppliers.

 

The next few months are indeed crucial keeping in mind the health of the Euro Zone which has been supported extensively by the ECB. However, the outcome of the upcoming referendum on Brexit will weigh heavily on this area as well as the global demand-supply scenario.