Crude Fall – A Game Changer for World Economy

 

Crude Fall  – A Game Changer for World Economy

Petrol in your Bike & diesel in your car, should you concern about falling crude? One should be happy. But eversince Crude touched  6 years low & the whole world is talking about the “Crude Shock”. We had anticipated in the month of July – August 2014 when price was hovering around $95-$100 bbl.  (Nymax). But it was purely based on fundamental factors.

One may read previous article at following link.

July Article on Crude – Fundamental

Fundamental Game changer – AUG 2014

Though, the recent downtrend in Crude is not surprising but sharp downward move to this level was never expected. Let’s look at the reason for sharp fall – :

  • Shale Oil discovery
  • Price war between oil producer
  • Weak Demand & global slowdown fear
  • Reduce  Geopolitical fears
  • Very strong dollar – Commodity prices are inversely correlated to the dollar

Fall in Crude is the plight of an oil-producing nation but consuming countries like the China, U.S & India are taking advantage. Though, it’s very difficult to find bottom for commodity specially crude, let’s look at the some of the fundamental demand and supply factors

  • Production cut is not an option – Don’t expect non-OPEC to cut production in near term as the operating cost is still lower. Probably $35-$40 bbl in Brent may impact them. Secondly, in last three and half year, they have sold much higher than their expected price. OPEC countries especially Saudi Arab is no mood to cut the production. Oil prices need to fall below operating cash costs before  they cut down their production
  • No significant demand change except Demand from China & India – It may be argued that lower prices will ultimately lead to a pickup in global oil demand but it is no so. In 2015 & 2016 higher demand will come only from China and India may increase due to higher consumption. Though, there is lot of doubts on china growth number. But, demand will be higher. Russia, Middle East is heading towards recession. Developed countries’ demand will be at same level.
  • Dollar index – Though many of the analysts are focusing on demand and supply of Crude, but to me, very strong dollar index certainly had impact on commodity & specially on crude. The U.S. dollar, at its highest level in nine years & commodity prices are inversely correlated to the dollar. The stronger currency makes dollar-priced commodities more expensive to buyers using other currencies.

Conclusion

The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from petro-states to industrialized consumers.

We feel that there will be a lot of consolidation at present level as fundamental adjustment (economy like Russia, OPEC) is going to take some time. One has to understand that the long term fundamental Oil dynamics has changed. This dynamics is going to change the way international trade happens. Most of the oil producing countries till yesterday dominated Global trade (Global Trade Balance) which is certainly going to change in days to come.

 

We will surely com-out with detailed fundamental article on Crude  & its long term impact on global wealth shift , trade balance & much more.

 

Must read –

http://www.marketwatch.com/story/here-are-the-reasons-oil-is-plunging-toward-60-2014-12-10

http://www.bloomberg.com/news/2015-01-07/oil-at-40-means-boon-for-some-no-ice-cream-for-others.html

 

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