While the last 2 years entirely have been an unstable duration for oil rates internationally, they have remained in a free fall since the last quarter of 2015. Criteria Brent closed at $33.10, while WTI closed at $32.30 on last Wednesday, January 27. The rates have fallen by about 70% from June 2014 peak costs. Remarkably however, the supply side players do not seem relenting anytime quicker. In truth, experts anticipate that the production is going to increase in near term, pressing the costs down even further. So, what is happening with the oil market?
Motorists of oil costs
Like other product, petroleum is also based on demand-supply characteristics. Basically, when production increases or need decreases, the worldwide rates fall. But that is not completion of the story. The marketplace players completely value how the present worldwide economy relies on this non-renewable fuel source and this generates speculation. Oil rates are set at the significant exchanges, ICE Futures in London (Brent) and Nymex in New York (WTI), that include a big share of speculative push. It is approximated that well over 50% of oil costs we see today is pure speculation! The significant piece of the derivatives market is owned by a handful of international banking giants and for that reason, system runs greatly on market beliefs. The costs so determined type the basis of petroleum prices in worldwide markets. Many oil manufacturers use the Brent.
When there is a favorable belief around need and supply of petroleum, the huge lenders take big future positions in expectation of speculative gains. This plays a crucial function in pumping costs, which in turn, brings in higher market activity trading and contributes to the rally.
The present depression is mainly credited to the possibility of a plunge in future need and existing oversupply in the market. A few of the huge customers, such as China, are facing an upcoming downturn. Problem is dripping from the other corners also. On the other hand, today market situation is marked with extreme competition in between oil producing business. Everybody is considering a larger share in the pie even if it means extending beyond the resources for the time being. It’s a no-brainer that a cut in production will have a salutary result on the rates, but the individual manufacturers and OPEC are playing the waiting game to see who yields initially. Unless there is an agreement, it is a high possibility that those who lower their production will lose market share to those who do not follow the fit. According to OPEC President Emmanuel Ibe Kachikwu, “We simply felt comfy to wait and watch.” The group thinks that even a 5% cut is not going to have much effect and is blaming shale oil for the mess. To contribute to a currently complicated circumstance, with the lifting of financial sanctions, Iran will quickly amp up its production.
Clearly, the importers and end users are rejoicing. But the gravity of the circumstance on the other end can be comprehended by the reality that the oil market has lost some 250,000 tasks around the world (Source: New York Times). The wait and watch policy will not be sustainable for the marketplace players and economies of the oil producing countries as a whole. While the huge energy businesses are feeling the pinch, some smaller sized players along the value chain have currently gone under.
It is hard to anticipate regarding the length of time this stalemate will stay, but most experts are of the view that if this pattern continues for long it may have a causal sequence on the world economy.