Price Drift: Crude oil

The global demand for oil is declining as the United States moves toward self-sufficiency and is the only nation in a positive economic trend. Global economy other than USA turning down since 2007 including China and Russia no less Europe.

The oil price has fallen in the past week for the first time since one and a half years under the $ 100 mark dropping to test the $90 level. Because of the weak economic outlook for Europe, Russia, and China, the IEA has now reviewed its global demand forecast for 2014 and 2015 downward. They expect 2014 global demand of only 92.6 million barrels per day – an increase of 900,000 barrels per day from the previous year. For 2015, the organization expects global demand of 93.8 million barrels per day – an increase of 1.2 million barrels per day.

Crude oil price trending down at around $47 per barrel. It is almost 50% down for most oil based economy. For most of the country BEP is $115. The current crude oil market appears to have been exhausted overnight. It’s already come down such a long way that one would expect it to try and find some equilibrium.

However there has been talk over the last 24 hours that $40 could be the absolute price floor for oil as all oil producers continue to lose money even with the price above $50 a barrel.

Crude oil slumped by around 48% last year, since 2008 US pumped at the fastest pace in more than 3 decades and  the organizations of petroleum exporting countries decided to maintain  its output ceiling and the oversupply may take month or years to be absorbed.

Downward trend of crude oil price can bring Russia to some danger zone as it has to make pull down its expanses on defense. As we all know Russia is the second country after USA which spends a lot on defense and it is an oil based economy.

Saudi Arabia could respond by trying to cut back on its own oil production in order to prop up global prices and many other country’s leader sounds a little more confident that they can survive the hit.

Oil’s slump accelerated after Saudi Arabia and other members of the Organization of Petroleum Exporting Countries decided on Nov. 27 to maintain their production ceiling. The 12-member group is seeking to protect market share rather than prices, challenging U.S. shale drillers and other rivals to pare their output instead.

The crude oil prices are expected to remain at low levels in the near-term, although oil prices could marginally recover over the next 1-2 years with slower production growth and demand recovery.

When it comes to India, It is more consumer than producer of oil and it can only produce 25% oil of its total uses and purchase the rest.

So it is a favorable condition for India and for other countries which buy crude oil but worst condition for them where it is being produced. Lower crude oil prices would materially impact profits of crude oil producers in India, it said adding the operating profit of Cairn India could decrease by about 35 per cent in 2014-15. If crude oil prices sustain in the range of USD 50-55 a barrel, the extent of discount for upstream companies would be a key driver of profits in FY16.

Investors are feeling the pain. Last month, they poured the most money in more than four years into funds that track crude oil on speculation prices will rebound from a five-year low.