Volatality in oil prices

THE recent volatility in global stock markets, the slowdown in China and the yuan devaluation have all combined to create a situation of uncertainty about the future of the world economy. As far as India is concerned, the one bright spot in all these developments is the fall in the international crude oil prices.

The decline in global oil prices has been so steep that prices of the benchmark Brent crude have fallen from $115 in June last year to about $50 per barrel September 2015.. The reasons are numerous.

First, the exploitation of shale oil reserves in the US has meant a sudden increase in oil availability in the world. US oil production has virtually doubled over the last six years.

Second, despite the increase in world oil output, the Organisation of Petroleum Exporting Countries (OPEC) has decided not to cut production of its member-countries. This has in the past been the standard method by which the cartel has controlled oil prices. Production quotas are laid down for member-countries to ensure that prices remain within an acceptable range. In the current scenario, OPEC has decided to allow prices to fall further by pushing up output. This is in the expectation that it would be uneconomic for American shale producers to continue production when prices fall below $55 per barrel.

As a result, the market is awash with crude oil supplies. Availability is set to rise even further following the US-Iran nuclear deal as it will bring more Iranian crude into the global market.

There is yet a third factor that has contributed to the steep decline in international prices  is lowered demand from the world economy. The slowdown in China has contributed largely to this dip in demand as it has been one of the world’s largest oil importers. Thus the recent crash in Chinese stock markets sent signals that demand was not likely to rise in the short term. 

By: Deepak Garg