Three months back, I was having a casual discussion with my friend based out of Singapore who coincidentally have some commodity traders as friends. Though, conversation was not focused on any particular topic, we eventually ended up discussing oil for a while and he mentioned that one of his friend was mentioning about fall in crude prices due to huge shale and oil discoveries in US. This was quite logical as US is the biggest consumer of oil and having her own reserves means, less dependence on OPEC (Organisation of the Petroleum Exporting Countries). I think, it aligns with the demand and supply theory.
I don't think I have imagined that fall will be this steep, a forty percent decline within three months. I would have shorted it, rather shorted a refinery stock like Reliance or ONGC given that I had grasped the collateral damage this fall is carrying. It's quite interesting to read into these events, and eventually it gets complicated when you dig more. Is it just a pure demand play?
The story started with US shale and oil reserves, and thus, less dependence on the oil producing nations. Oil in US is made available at lesser prices per barrel, the last I read was sub $60/barrel whereas Brent hovering at $100/barrel. The prices will converge as US not dependent on this expensive oil. Therefore, there is more supply and less demand. To balance out the prices, balance the supply as per the demand. This sounds simple logic, however it is not. OPEC decided not to cut production which led to price correction. There were some news making bold headings that all this shit is rigged. Oil producers are now trying to eliminate the low cost small shale producers. It's easy, you make oil cheaper than shale or the crude produced in the US. Small players may not be able to survive for long.
OPEC is like a cartel, and normally supply is balanced out by cutting or increasing oil production, and no production cuts have been announced. There are some forecast reports which indicated less demand in 2015. This is another area of debate, whether OPEC can cut the production or not.
Declining oil prices is like a bonus for the oil importing nations like India. Petrol prices are down by INR 13 per litre, and there is a similar but lesser impact on the diesel prices as the prices were highly subsidised. Indian government used this opportunity to free up the diesel prices. This is going to have a cascading impact on inflation, fiscal, and on industries which use crude as raw material e.g. Paint, tyre etc. Stock prices of some the companies are zooming in the expectation that companies will show higher margins due to decline in input costs. Well, this is one side of the story. Refiners are beaten down with bears taking over full control. The reasons are multiple, a) less oil supply means less refining volumes reducing profits b) large refineries which can process very large quantities of crude will not be fully utilized, thus reducing margins as these still need to be maintained c) oil and gas producing companies may not be able to make any positive cash flows if the their cost of production is higher than the market rate making the businesses loss making and companies will have difficulties in servicing debt which may have a cascading impact on banks. Think about the inventories built at $90 per barrel and with crude down to $65 per barrel, who is going to take that loss.
There will indeed an impact on the alternative green fuel theory like CNG, PNG. I believe business are more driven by Math rather carbon, though, you can have some incentives through carbon trading. On a positive side, less demand for bio fuels will bring down the commodity prices giving more power to the consumption story. It totally depends on how long the low oil prices stay.
In a trade, someone loss is someone's gain. Eventually, end consumer is going to save and spend more which means consumption will rise and thus, more demand. The whole cycle will reverse, when and how sooner, perhaps, no one knows.
vA
Reliance and ONGC are the listed companies on the Indian leading stock exchanges. These conglomerates are into multiple businesses including refining, crude and gas producing businesses.
I don't think I have imagined that fall will be this steep, a forty percent decline within three months. I would have shorted it, rather shorted a refinery stock like Reliance or ONGC given that I had grasped the collateral damage this fall is carrying. It's quite interesting to read into these events, and eventually it gets complicated when you dig more. Is it just a pure demand play?
The story started with US shale and oil reserves, and thus, less dependence on the oil producing nations. Oil in US is made available at lesser prices per barrel, the last I read was sub $60/barrel whereas Brent hovering at $100/barrel. The prices will converge as US not dependent on this expensive oil. Therefore, there is more supply and less demand. To balance out the prices, balance the supply as per the demand. This sounds simple logic, however it is not. OPEC decided not to cut production which led to price correction. There were some news making bold headings that all this shit is rigged. Oil producers are now trying to eliminate the low cost small shale producers. It's easy, you make oil cheaper than shale or the crude produced in the US. Small players may not be able to survive for long.
OPEC is like a cartel, and normally supply is balanced out by cutting or increasing oil production, and no production cuts have been announced. There are some forecast reports which indicated less demand in 2015. This is another area of debate, whether OPEC can cut the production or not.
Declining oil prices is like a bonus for the oil importing nations like India. Petrol prices are down by INR 13 per litre, and there is a similar but lesser impact on the diesel prices as the prices were highly subsidised. Indian government used this opportunity to free up the diesel prices. This is going to have a cascading impact on inflation, fiscal, and on industries which use crude as raw material e.g. Paint, tyre etc. Stock prices of some the companies are zooming in the expectation that companies will show higher margins due to decline in input costs. Well, this is one side of the story. Refiners are beaten down with bears taking over full control. The reasons are multiple, a) less oil supply means less refining volumes reducing profits b) large refineries which can process very large quantities of crude will not be fully utilized, thus reducing margins as these still need to be maintained c) oil and gas producing companies may not be able to make any positive cash flows if the their cost of production is higher than the market rate making the businesses loss making and companies will have difficulties in servicing debt which may have a cascading impact on banks. Think about the inventories built at $90 per barrel and with crude down to $65 per barrel, who is going to take that loss.
There will indeed an impact on the alternative green fuel theory like CNG, PNG. I believe business are more driven by Math rather carbon, though, you can have some incentives through carbon trading. On a positive side, less demand for bio fuels will bring down the commodity prices giving more power to the consumption story. It totally depends on how long the low oil prices stay.
In a trade, someone loss is someone's gain. Eventually, end consumer is going to save and spend more which means consumption will rise and thus, more demand. The whole cycle will reverse, when and how sooner, perhaps, no one knows.
vA
Reliance and ONGC are the listed companies on the Indian leading stock exchanges. These conglomerates are into multiple businesses including refining, crude and gas producing businesses.
