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Given that signs of a recovery in crude oil demand are still elusive and a cut in supply is still not visible, when the slide in prices might halt remains an unanswered question for analysts. The thought of these coming further down is a cause for concern - for oil-producing countries, as well as India's upstream oil companies.
The Goldman Sachs group recently predicted the US crude oil price might fall below its earlier six-month forecast of $39 a barrel. There are many analysts, however, who say the oil price is close to the bottom. "Broad expectations are that after nine months, the crude oil price will be in the range of $60-65 a barrel, and beyond that period, in 12 months from now, it will start picking up," says Aditya Gandhi, director, Sapient Global Markets India.
At the moment, the supply side of the oil market has three significant angles to it. Some countries in West Asia are in the grip of violence unleashed by the Islamic State of Iraq & Syria - that could pose supply challenges - but analysts see this as balancing out, and not affecting prices much. "Iraq had planned to increase production from three million barrels per day (bpd) to eight million bpd. The current supply does not get affected but future increase might not take place," says Gandhi.
Another important feature is Saudi Arabia's leadership of the Organization of the Petroleum Exporting Countries (Opec), which has steadfastly refused to lower supply. Though there were whispers in the oil world that with Saudi King Abdullah-bin Abdulaziz's death the strong no-supply-cut stand might be changed. But analysts see no such development, especially after retention of the oil minister in that country. "A large part of the Saudi thought process has been driven by the oil minister, so there will not be any change," Gandhi suggests.
The other spectrum of supply side is the US shale and other non-conventional oil and gas. As more shale producers feel the crunch from debt, Gandhi says, they will either get acquired by bigger players or go bankrupt. "This might be a breaking point that can have a more disruptive impact on production."
A reduced price brings down the ability to produce from scavenger wells. Any price below $70 a barrel affects this production. Besides, though price points for shale differs according to field and formation, a large part of the US' Eagle Ford formation could produce below $50 a barrel but a number of these wells become unprofitable after $40. Gandhi says this does not mean they will not produce but, since a major portion of investment would have already been made, they would need to continue production to service debt and meet operational expenses. No fresh investment, however, might be made. According to International Energy Agency (IEA), if prices decline to the mid- or low-$40s a barrel and remain there for an extended period, a sizeable share of the US production will be unprofitable.
On the demand side, "with a few notable exceptions like the US, lower prices do not appear to be stimulating demand just yet. That is because the usual benefits of lower prices - increased household disposable income, reduced industry input costs - have been largely offset by weak underlying economic conditions which have themselves been a major reason for the price drop in the first place," IEA said in a report earlier this month. In fact, steep drops in crude oil prices are only providing a limited boost to demand, as the price decline is itself at least partly demand-driven.
Other factors, such as weak currencies in consumer economies, subsidy cuts, consumer tax hikes, lower spending in producer countries and mounting deflationary concerns, have kept demand growth in check so far. Demand growth is still forecast to somewhat pick up this year from the last one but it is not expected to exceed 900,000 bpd.
The total global oil product demand averaged 92.4 million bpd in 2014, an increase of 620,000 bpd (or 0.7 per cent) over a year earlier. This marked a five-year low for growth, as sharp declines in OECD (Organisation for Economic Co-operation and Development) Europe and OECD Asia-Oceania coincided with notable slowdowns in China, the former Soviet Union and Latin America. "Global growth is forecast to modestly accelerate in 2015, to 910,000 bpd (or +1.0 per cent), as macroeconomic momentum is tentatively forecast to pick up," said IEA.
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