Friday, August 14, 2015

Zip Zap Zoom Oil ride - Major factors

Driving Factor
Excess supply causing downward pressure on oil prices

  • US Shale Gas production has increased. 
  • US status has changed from oil importing countries to Domestic producer. 
  • Technological innovation (hydraulic fracturing technique) in US has made extracting oil from non-accessible areas possible. 
  • This has boosted its oil production. Further, lots of Capex was incurred among US upstream companies to extract shale gas, this capex is now giving its reward and further increased oil & gas supply  
  • Saudi Arabia has 11 -12% of world oil reserves (highest). It is largest oil producer. 
  • It continued to maintain its production targets to retain its market share and not to face situation like in early 1980s, wherein it cut down its production to stop further fall in price, however other countries continued to maintained its production thereby acting as double blow to Saudi Arabia’s revenue
  • Libya – production continued at normal pace inspite of unrest / war
  • Russia - continues to increase its production
  • Iran – US lifted ban on Iran oil. Iran pushing Opec members to renew cartel quota’s system. Thereby, production of Iran Oil will increase. Plan to increase its production to 2.3 million barrel of oil per day at earliest from its current (early Jul 2015) production of 1.2 million barrels of oil per day. 
  • This would increase supply of oil, thereby provide further downward pressure on falling oil prices. It has 10% of world oil reserve, second after Saudi Arabia

  • Demand for crude has fallen mainly – fall in import by China and recession like scenario in European countries
  • With fall of Greece (where China has highest investment), Chinese stocks has fallen, this has created uncertainty among Chinese consumer, thereby demand for oil has fallen

  • Saudi Arabia – all oil found onshore. It has least total cost of oil production – which comes to around $5- $6 per barrel. Other Middle East countries has average total cost of $25 per barrel
  • Oil production from Europe and North Sea is in deepwater. Extracting oil from Deepsea is more difficult than onshore thereby increases the cost of extraction. Average cost hovers around $52 - $56 per barrel
  • In Russia – average cost is around $50 per barrel
  • US - Implementation of latest technology by US upstream oil companies has increased total cost of production to $65 per barrel. Inspite of high cost, US companies are reluctant to cut down its production to retain its market share.

Considering the major factors impacting oil prices are supply centric, oil price would remain around $40 - $50 per barrel till the time strong demand factors would counter supply forces.

With low oil prices, industry / sectors to benefit are
Using oil and its derivative as input
  • Paints companies
  • Tyres companies
  • Synthetic textile (additional supporting factor – labour cost in China going up)
  • Plastic processing
  • Organic Chemical industry
  • Fertilizer – naptha based plants
  • Automobiles
  • Transportation and Logistic companies

Economic Times, Reuters, Bloomberg, The Economist and WSJ