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Oil price hits 11 year low on global oversupply & lower heating oil demand

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 22, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Brent oil price hit an eleven year low yesterday as prices fell 2 per cent and dropped to $36.05, the weakest price registered since July 2004. It even stayed below the financial crisis low of $36.20 reached on December 24 2008. It finished the day at $36.35, down 1.4 per cent. The price of US crude on the other hand dropped 40 cents to $34.17 a barrel, its lowest since 2009. Global oversupply coupled with fall in demand for heating oil on warmer-than-normal temperatures led to the sharp fall in prices yesterday.

    The global oil glut has weighed on prices ever since the OPEC abandoned its policy of price control and replaced it with Saudi Arabia championed market share strategy. The OPEC at its December 6th meeting held in Vienna chose to disregard the supply side concerns and maintained its policy of pumping near-record volumes of oil further adding to the already existing glut that has caused oil price to slum. The group decided to increase its collective output ceiling to 31.5 million barrels per day (bpd) from the previous 30 million. Oil prices had fared well before OPEC’s new policy got initiated. In June 2014, the price of oil was traded at $115 per barrel. Since then oil prices fell oil more than 70 per cent.

    How oil price slump has hurt major economies?

    One could argue that low oil prices have left more disposable income as consumers have enjoyed the falling price of fuel in the form of lower petrol prices. Several UK supermarkets have already started selling petrol at below £1 per litre. They last sold petrol at such low prices in 2009. However, the counter argument the slump in oil prices has kept prices in check. Low oil prices have hindered major central banks’ objective to raise inflation from record low levels to their targets.

    Profits of oil firms have been hit. This in turn has forced these firms to opt for cost saving techniques and thus they cut spending in investment and exploration. Oil firms have also laid off employees hurting employment rate in most countries.

    The budget deficit for oil exporting countries have widened drastically in the last one year. The plunge in oil revenue caused governments to cut spending as revenue from oil plunges.

    Going forward

    As Saudi Arabia and Iran is not likely to show any restrain and continue pumping, markets worry Venezuela's oil minister’s concern that oil price could touch as low as $25 might translate into reality.

    The situation can hardly be expected to improve in 2016. On the contrary it might worsen as Iran begins to contribute to the global oversupply after sanctions are removed. Iraqi oil minister Adel Abdel Mahdi has also declared his country’s intention to further raise output in 2016 after having already increased production steeply in 2015. More US and Russian oil will also be reaching the markets adding to the already existing glut.

    Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut believes both OPEC and Russia will continue pumping record volumes. This, he said will step up pressure on U.S. producers to “throttle back production.”

    Demand however is not likely to increase at this year’s pace, which leads Adam Longson, analyst at Morgan Stanley to opine that the hope “for a rebalancing in 2016” is set to suffer “serious setbacks”.
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