Prof. Soman Nambiar,
Sr. Professor, School of Management,
The days of boom for the Oil Industry seem to be over. The Oil industry is experiencing the biggest downturn since the late Nineties. Oil companies have been forced to decommission more than 70% of their rigs along with sharp reduction of investment in oil fields. Thousands have lost their livelihood and many more are expected to follow suit
Not an encouraging scenario!. But why is there such a sharp decline in crude prices since the mid 2014?
Ruling Crude Oil Price as on February 19, 2016 is $ 29.72 per barrel from the last year’s high of $125. Many reasons have been put forth. But an unbiased analysis of the scenario revealed the following. The causes of this unexpected downturn are attributable, inter alia, to the resurging U.S. dollar, the OPEC-driven supply glut, declining demand for this energy product globally and last but not the least, the US-Iran Nuclear Deal.
Resurgent US Dollar
The U.S. dollar, at nearly an all-time high against most currencies, has been seen as a primary trigger for the price decline of crude oil over the last few years. It is well known fact that when the local currency is strong there is a reduction in the commodity prices in that country. Given the fact that global commodity prices are always denominated in terms of USD and hence, a relatively strong USD has had its adverse impact on the crude oil price. This is an economic compulsion.
Over Supply of Crude Oil
The Organisation of Petroleum Exporting Countries [OPEC] , a cartel of oil producers, is unrelenting in and unwilling to stabilize the oil markets. The prices of OPEC’s crude oil have witnessed a more than 60% decline since 2014 when OPEC decided against production cuts. This decision was not unanimous in that Venezuela, Algeria and Iran wanted to peg production output but Saudi Arabia, UAE, Iraq, Qatar and other Middle East Countries refused to do so. Compounding this was the stance of Russia in continuing to increase output of crude oil. The increasing output of Tight Oil or Shale Oil by the USA has resulted in lesser import of Crude Oil by it, further accentuating the oversupply cauldron. Production @ 9.35 barrels a day in far in excess of the demand.
Oversupply has resulted in stockpiles of crude oil across the world. At almost 500 million barrels, U.S. crude oil inventories are at the highest level in at least the last 80 years, triggering a decline in prices.
Compounding the increase in supply is the decrease in the relative demand for crude oil. The economies of Europe, China and other developing countries are experiencing economic downturn and in some cases, political upheavals. At the same time vehicles are becoming more fuel efficient resulting in a lag in demand. China is the largest global importer of crude oil and its economic woes has definitely dented the demand for crude oil.
The US-Iran Nuclear Deal
The Nuclear Deal reached between Iran and the USA permits Iran to export more oil. The hitherto sanctions against Iran has been removed and Iran is expected to add to global oil supply. Markets have reacted very pessimistically to this deal and prices of crude have taken its hit.
The pundits believe that the prices of Crude Oil is not expected to rise to its pre-2014 days , in few years to come. All economic, political and commercial indicators lead to this bleak outlook.