Oil Price Volatility: Uncertainty and Opportunity

Strategic Insights -

As the global oil market continues to navigate extreme price volatility, major oil companies, international agencies, and investment banks are wrestling with the uncertainty of future prices. The Indian government, meanwhile, faces a critical decision on whether to continue subsidizing oil prices, particularly for residential LPG, which has become a hot potato following the AAP's stunning success in Delhi's election.

Key Takeaways:

  • Oil prices have fallen by over 50% since June 2014, with Brent prices reaching a low of $45 in January 2015, but have since recovered to above $60, an increase of 38%.
  • Forecasting oil prices is an art than science, with many unpredictable factors at play, including supply and demand uncertainties, geographies of oil-producing countries, and geopolitical tensions.
  • Oil experts predict a range of possible outcomes, from prices falling to $10 to rising to $100 or even $200, with the International Energy Agency (IEA) and Energy Information Administration (EIA) predicting average prices of $58 for 2015 and $67 for the fourth quarter.
  • The EIA predicts an oil price range for December 2015 between $32 and $108, while a recent study by Wood Mackenzie found that only 1.6% of 2,200 oil fields surveyed would have negative cash flow even at $40.
  • The marginal cost of shale oil production in the US is only $20, while Saudi Arabia's decision to maintain market share and allow the market to set prices may not have had the expected response from oil-exporting countries.
  • The greatest uncertainty lies in the possible disruption of oil supplies in politically unstable countries like Iraq, Iran, Libya, Nigeria, and Venezuela, which could add three million barrels per day to global supplies.
  • Despite supply and demand uncertainties, the oil market's current production spare capacity of around 3.4 million barrels per day leaves it vulnerable to price shocks.
  • The Indian government faces a critical decision on whether to continue subsidizing residential LPG, which may cost the exchequer over Rs 1,00,000 crore per year if prices rise to $100 or above.

Statistics:

  • Global oil prices have fallen by over 50% since June 2014.
  • Brent prices reached a low of $45 in January 2015 and have since recovered to above $60, an increase of 38%.
  • The IEA predicts oil consumption to increase by 1.2 million barrels per day (mmbd) to reach 92.3 mmbd in 2015.
  • The EIA predicts an average oil price of $58 for 2015 and $67 for the fourth quarter.
  • The EIA predicts an oil price range for December 2015 between $32 and $108.
  • A recent study by Wood Mackenzie found that only 1.6% of 2,200 oil fields surveyed would have negative cash flow even at $40.
  • The marginal cost of shale oil production in the US is only $20.
  • Saudi Arabia's decision to maintain market share and allow the market to set prices may not have had the expected response from oil-exporting countries.
  • The greatest uncertainty lies in the possible disruption of oil supplies in politically unstable countries like Iraq, Iran, Libya, Nigeria, and Venezuela, which could add three million barrels per day to global supplies.

Sources:

  • Bharat Petroleum Corporation Limited
  • Citibank
  • JP Morgan
  • International Energy Agency (IEA)
  • Energy Information Administration (EIA)
  • Wood Mackenzie (Energy Research Organization)