Saturday, December 26, 2015

Oil Sector Global Outlook 2016

Oil Prices

Prices of any commodity are majorly driven by its demand and supply. So, Crude oil prices are driven by demand for petroleum products (crude extracted product) and supply of crude oil (production or extraction of crude oil).

However, in case of crude oil, prices are impacted by political and economic events in addition to demand and supply of crude oil. The impact of different political and economic events on oil prices over last 4 decades is highlighted in graph below. In 2015, excess of supply along with falling crude demand has led to drastic fall in oil prices.

Crude prices are measured as - Brent crude and West Texas Intermediate (WTI) crude. 

Brent refers to oil from North Sea fields. WTI refers to oil explored from US wells. WTI crude is lighter and sweeter than Brent crude, thereby makes it ideal crude for refining into diesel, gasoline and other products. WTI is expensive to ship to different part of the world.

As of Dec 19, 2015 - spot price of WTI Crude Oil (Nymex) is $34.55 / bbl and Brent Crude (ICE) is $36.88/bbl. 

In the WTI - Brent graph (below), we see steep downward trend on oil price during last 2 years. Oil prices peak in Jun 2014 to $105.79 / bbl for WTI and $111.8/bbl for Brent and reached its low in Dec 2015. As per Citigroup, crude oil prices may fall into $20s in 2016.

With removal of ban on oil export by United States, the spread between WTI and Brent is likely to fall and remain narrow. However, raise in US interest rate would make USD denominated oil costlier. However, spread between WTI and Brent collapsed on Dec 22, 2015 with both crude were trading at $36.33. Considering the premium quality of WTI, there is a possibility of WTI quoting at premium to Brent.

Oil Demand

Global oil demand is driven by its major oil consumption countries. Following is analysis of 5 major oil consuming countries.

  • USA : Significant domestic oil production, falling reliance on OPEC for crude oil and encouraging use of fuel substitute in cars.
  • China : Slowdown in manufacturing sector, purchase limit policy for automobiles has impacted auto sales and incentive for electric and hybrid cars would lower demand for crude oil.
  • Japan : Major exporter to China and indirectly affected by slowdown in Chinese economy.
  • India : High economic growth and Pro-growth policy of government is expected to drive oil demand.
  • Saudi Arabia : is net exporter of crude oil.