A5_MAE_CRUDE_OIL_CRASH.docx

8/19/2019 A5_MAE_CRUDE_OIL_CRASH.docx

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Shri Dharmasthala Manjunatheshwara

Institute for Management Development.

A Project Report On

CRUDE OIL MARKET CRASH

IMPACT ANALYSIS

Submitted to

Dr. Venkataraja B.

Assistant Professor – Economics

Submitted by,

15023 HARHAD !"HRA

1502# H"!A !ADA$

15025 %A&RA'"

1502( %E"!A1502) *A+A$* A*HA, PA"

GRO! "#, S$%&IO' "

() M"R%* +)(


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&"-$ O/ %O'&$'&S1. INTRODUCTION TO CURRENT OIL MARKET.........................................................1

2. GLOBAL WORLD OIL DEMAND.............................................................................2

3. OPEC INFLUENCE IN WORLD OIL MARKET..........................................................#

4. IMPACTS OF DROP IN OIL PRICES ON WORLD ECONOMY.....................................55. REASONS FOR RAPID DROP IN OIL PRICES...........................................................(

6. THE JOURNEY OF OIL PRICE DROP IN A NUTSHELL..............................................)

7. BENEFITS FROM THE PRICE DROP.....................................................................13

. LOSERS FROM THE PRICE DROP........................................................................13

!. EFFECTS ON RUSSIA...........................................................................................13

1". EFFECTS ON #ENE$UELA...................................................................................1#

11. EFFECTS ON SAUDI ARABIA................................................................................15

12. EFFECTS ON UNITED STATES..............................................................................15

13. EFFECTS ON EUROPE AND ASIA..........................................................................15

14. EFFECTS ON INDIA............................................................................................. 1(

15. EFFECTS ON OPEC COUNTRIES..........................................................................1)

16. CONSPIRACIES ON DROPPING OIL PRICES FURTHER .........................................1-

17. CHANCES OF RECO#ERY OIL PRICES.................................................................1-

1. REFERENCES......................................................................................................1


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CRUDE OIL MARKET CRASH% IMPACT ANALYSIS

1. INTRODUCTION TO CURRENT OIL MARKET

The OPEC Reference Basket (ORB), which is a weighted average of prices for petroleum lends

produced ! OPEC countries declined ! around "#$ to average %"&'* in +anuar! "#&'

orld economic growth has een revised down to -'"$ for "#&'OEC. growth in "#& has

een revised lower to "'$, the same pace as in the previous !ear' /n the emerging economies,

China0s growth in "#& has een revised down slightl! to &'-$ while /ndia0s growth has een

revised lower to 1'$' 2eanwhile, increasing difficulties in oth Bra3il and Russia are seen

pushing oth economies into recession for the second consecutive !ear/n "#&, world oil demand

is e4pected to grow ! #'" m*d, representing a marginal lower ad5ustment of # t*d from the

previous forecast, to average 67'"# m*d' 8on9OEC. countries will continue to contriute the

ulk of oil demand growth this !ear'

/n "#&, non9OPEC oil suppl! is pro5ected to decline ! '1 m*d, following a downward

revision of 7 t*d, mainl! due to announced cape4 cuts ! international oil companies, the fall

in active drilling rigs in the :; and Canada, and a heav! annual decline in older fields' OPEC

8sia, refiner! margins edged higher on the recover! seen at the

ottom of the arrel due to stronger regional demand'

.irt! tanker fright rates rose on average in +anuar!, supported ! higher ;ue3ma4 rates on the

ack of strong tonnage demand and dela!s in the Turkish straits' Both ?=CC and >frama4 rates,

however, saw declines' /n the clean tanker market, freight rates showed significant gains over the

previous month, oth East and est of ;ue3, on the ack of stead! demand'

OEC. commercial oil stocks fell in .ecemer to stand at ",617 m' Crude and products showed

surpluses of aout "76 m and m, respectivel!' OEC. commercial stocks stood at &-'1 da!s

in .ecemer, unchanged from the previous month'

/n "#&, demand for OPEC crude is e4pected at -#'& m*d, a gain of #'@ m*d, higher than last

!ear'

#

https://en.wikipedia.org/wiki/Petroleumhttps://en.wikipedia.org/wiki/Petroleum


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• e can also categori3e the world oil demand into OEC. and non9OEC. countries' OEC.

consists of -7 memer countries spanning all around the gloe, from 8orth and ;outh

>merica to Europe and >sia9Pacific (Tale #)' The! include man! of the world0s most

developed countries' 2a5or 8on9OEC. countries include /ndia, China, etc'

• /n OEC. Europe the strong demand growth seem in "# is not e4pected to e repeated this

!ear' ;ignificant Economic uncertainties, along with fuel sustitution in the road

transportation sector, are e4pected to weigh on oil consumption in the region' /n OEC. >sia9

Pacific, oil demand assumptions for +apan in "#& are less promising compared to the

previous !ear, mainl! as a result of pro5ected slower economic growth and e4pectations that

more than handful of nuclear plants will restart operation'

• /n the non9OEC. countries, oil demand growth in "#& is e4pected to e around #'# m*d,

even with slightl! lower growth from China' The outlook for China, with


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• Currentl! there are #- memer countries in OPEC and accounts for 7$ of the world0s

oil production' OPEC0s oil e4ports represent aout &$ of the total petroleum traded

internationall!'

• OPEC pla!s a crucial role in maintaining stailit! and control over the oil prices in gloal

market' >round @#$ of oil reserves in the world are located in OPEC countries' =owest

cost of oil production'

• The policies implemented ! OPEC are helpful in the determination of gloal prices of

oil and gas' The innovative OPEC oil price mechanism helped to gain strength and

staili3e the crude oil prices'

• OPEC pla!ed an important role in supporting the oil sector, as a part of world efforts to

face the economic crisis'

• Oil and gas prices are not onl! influenced ! market demand and suppl!, ut also !

wars, political considerations, national interests, etc'

• The prices were stale etween "## and mid9"#7 efore an oversuppl! was responsile

for their fall' The ma5or reason ehind the oversuppl! was that during the OPEC

memers meet in ?ienna, >ustria in .ec "# the cartel decided not to put an! cap on oil

production, which led to fall in the oil prices elow %- per arrel'

4. IMPACTS OF DROP IN OIL PRICES ON WORLD ECONOMY

The oil industr!, with its histor! of ooms and usts, is in its deepest downturn since the #66s,

if not earlier'

Earnings are down for companies that made record profits in recent !ears, leading them to

decommission more than two9thirds of their rigs and sharpl! cut investment in e4ploration and

production' ;cores of companies have gone ankrupt and an estimated ", oil workers have

lost their 5os'

The cause is the plunging price of a arrel of oil, which has fallen more than 1 percent since

+une "#7'

Prices recovered a few times last !ear, ut the cost of a arrel of oil has alread! sunk this !ear to

levels not seen since "- as an oil glut has taken hold'

>lso contriuting to the glut was /ran0s return to the international oil market after sanctions were

lifted against the countr! under an international agreement with ma5or world powers to restrict its

nuclear work that took effect in +anuar!'

)


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E4ecutives think it will e !ears efore oil returns to %6 or %# a arrel, a price that was prett!

much the norm over the last decade'

Brent crude, the main international enchmark, was trading at around %7# a arrel on Thursda!'

The >merican enchmark was at around %-@ a arrel'

5. REASONS FOR RAPID DROP IN OIL PRICES

it oils down to the simple economics of suppl! and demand'

:nited ;tates domestic production has nearl! douled over the last several !ears, pushing out oil

imports that need to find another home' ;audi, 8igerian and >lgerian oil that once was sold in

the :nited ;tates is suddenl! competing for >sian markets, and the producers are forced to drop

prices' Canadian and /rai oil production and e4ports are rising !ear after !ear' Even the

Russians, with all their economic prolems, manage to keep pumping'

There are signs, however, that production is falling ecause of the drop in e4ploration

investments' ood 2acDen3ie, a consulting firm, identified &@ large oil and natural gas pro5ects

worldwide, with a comined value of %-@ illion, that have een put on hold around the world

since prices started coming down, halting the production of "'6 million arrels a da!'

2eanwhile, RBC Capital 2arkets has calculated pro5ects capale of producing more than a half

million arrels a da! of oil were cancelled, dela!ed or shelved ! OPEC countries alone last

!ear, and this !ear promises more of the same'

-


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But the drop in production is not happening fast enough, especiall! with output from deep waters

off the


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• The chart shown elow showing production ! OPEC shows the shape of its curve which

looks similar to the world0s, at least until the start of this decade' The #-9nation Organi3ation

of Petroleum E4porting Countries has long een a dominant force in the gloal market,

manipulating prices ! holding ack or releasing supplies'

• But recentl!, the world0s price and production curve has shifted'

• /t now resemles that of the :nited ;tates, where a shale oil oom has caused production to

soar' That has shifted the countr! toward the role of gloal swing producer F a supplier with

enough spare capacit! to respond uickl! to markets and affect prices'

10


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• /n the late #66s, as an economic crisis in East >sia rought down demand for oil, OPEC

continued to increase its production' Prices fell to a level the! haven0t reached since F

%#7'- a arrel in toda!0s dollars'

• Chinese demand for oil accelerated in the earl! "s, as its manufacturing and other

industrial sectors took off and a wealthier population put more vehicles on the road' OPEC

increased production in response'

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• >t the same time, aging oil fields and a lack of investment caused :';' production to

decrease'

• ;oon after, the /ra ar and several other conflicts and disasters slowed down gloal oil

production' The flat suppl! coupled with rising demand from emerging markets, uncertaint!

aout future supplies and increased speculation resulted in a 5ump in prices'

• Prices plummeted in "@ as the gloal financial crisis took hold

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• Prices recovered in "6 and "# after OPEC slowed its production'

• >t the same time, producers in the :nited ;tates egan to unlock oil from shale rock' hile

prices were still high, :';' companies invested heavil! in new technolog!, and production

surged, particularl! in Te4as and 8orth .akota'

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• /n "#7, slow gloal economic growth and une4pected production increases in =i!a and

/ra sent oil prices down' /n 8ovemer, OPEC decided not to slow production, seeking to

maintain its market share and put price pressure on :';' companies' The decision reflected

the :nited ;tates0 growing role as the world0s swing producer'G IMAGE IN NEXT PAGE]

• /n "#, a long period of low prices has led to economic and political turmoil in ma5or oil9

e4porting countries like Russia and ?ene3uela' hile there are signs that production in the

:nited ;tates and elsewhere ma! e starting to fall, oil e4ecutives think it will take !ears for

prices to return to %# a arrel'

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7. BENEFITS FROM THE PRICE DROP

>n! motorist can tell !ou that gasoline prices have dropped' .iesel, heating oil and natural gas

prices have also fallen sharpl!'

The latest drop in energ! prices F regular gas nationall! now averages around %#'1& a gallon,roughl! down aout 7- cents from the same time a !ear ago F is also disproportionatel! helping

lower9income groups, ecause fuel costs eat up a larger share of their more limited earnings'

Households that use heating oil to warm their homes are also seeing savings'

. LOSERS FROM THE PRICE DROP

or starters, oil9producing countries and states' ?ene3uela, 8igeria, Ecuador, Bra3il and Russia

are 5ust a few petrostates that are suffering economic and perhaps even political turulence'

The impact of estern sanctions caused /ranian production to drop ! aout one million arrels

a da! in recent !ears and locked /ran from importing the latest estern oil field technolog! and

euipment' ith sanctions now eing lifted, the /ranian oil industr! is e4pected to open the taps

on production soon'

/n the :nited ;tates, there are now virtuall! no wells that are profitale to drill'Chevron, Ro!al

.utch ;hell and BP have all announced cuts to their pa!rolls to save cash, and the! are in far

etter shape than man! smaller independent oil and gas producers'

;tates like >laska, 8orth .akota, Te4as, Oklahoma and =ouisiana are facing economic

challenges'

There has also een an uptick in traffic deaths as low gas prices have translated to increased road

travel' >nd man! !oung ;audis have seen cush! 5os vanish'

!. EFFECTS ON RUSSIA

Russia loses aout %"n in revenues for ever! dollar fall in the oil price, and the orld Bank has

warned that RussiaIs econom! would shrink ! at least '1$ in "# if oil prices do not recover'

.espite this, Russia has confirmed it will not cut production to shore up oil prices'

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"If we cut t!e imorter countries will increase t!eir roduction and t!is will mean a loss of our nic!e

mar#et" said Energ! 2inister >le4ander 8ovak'

alling oil prices, coupled with western sanctions over RussiaIs support for separatists in eastern

:kraine have hit the countr! hard'The government has cut its growth forecast for "#,

predicting that the econom! will sink into recession'

ormer finance minister, >le4ei Dudrin, said the currenc!Is fall was not 5ust a reaction to lower

oil prices and western sanctions, Jut also Ga show ofK distrust to the economic policies of the

governmentJ'


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The governmentIs caution is understandale' > petrol price rise in #6@6 saw widespread riots that

left hundreds dead'

11. EFFECTS ON SAUDI ARABIA

;audi >raia, the worldIs largest oil e4porter and OPECIs most influential memer, could support

gloal oil prices ! cutting ack its own production, ut there is little sign it wants to do this'

There could e two reasons 9 to tr! to instill some discipline among fellow OPEC oil producers,

and perhaps to put the :;Is urgeoning shale oil and gas industr! under pressure' >lthough ;audi

>raia needs oil prices to e around %@ in the longer term, it has deep pockets with a reserve

fund of some %1n 9 so can withstand lower prices for some time'

J/n terms of production and pricing of oil ! 2iddle East producers, the! are eginning to

recognise the challenge of :; production,J sa!s Roin 2ills, 2anaar Energ!Is head of consulting' /f a period of lower prices were to force some higher cost producers to shut down,

then Ri!adh might hope to pick up market share in the longer run'

However, there is also recent histor! ehind Ri!adhIs unwillingness to cut production' /n the

#6@s the countr! did cut production significantl! in a id to oost prices, ut it had little effect

and it also adl! affected the ;audi econom!'

12. EFFECTS ON UNITED STATES

"T!e growt! of oil roduction in Nort! America articularl$ in t!e +, !as been

staggering" sa!s Columia :niversit!Is +ason Bordoff'

+ason Bordoff said that :; oil production levels were at their highest in almost - !ears'/t has

een this growth in :; energ! production, where gas and oil is e4tracted from shale formations

using h!draulic fracturing or fracking, that has een one of the main drivers of lower oil prices'

",!ale !as essentiall$ se%ered t!e lin#age between geoolitical turmoil in t!e iddle East

and oil rice and euities" sa!s ;eth Dleinman, head of energ! strateg! at Citi'

Even though man! :; shale oil producers have far higher costs than conventional rivals, man!

need to carr! on pumping to generate at least some revenue stream to pa! off dets and other

costs'

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13. EFFECTS ON EUROPE AND ASIA

ith EuropeIs flagging economies characterised ! low inflation and weak growth, an! enefits

of lower prices would e welcomed ! eleaguered governments'

> #$ fall in oil prices should lead to a '#$ increase in economic output, sa! some' /n general

consumers enefit through lower energ! prices, ut eventuall! low oil prices do erode theconditions that rought them aout'

China, which is set to ecome the largest net importer of oil, should gain from falling prices'

However, lower oil prices wonIt full! offset the far wider effects of a slowing econom!'

+apan imports nearl! all of the oil it uses' But lower prices are a mi4ed lessing ecause high

energ! prices had helped to push inflation higher, which has een a ke! part of +apanese Prime

2inister ;hin3o >eIs growth strateg! to comat deflation'

/ndia imports 1$ of its oil, and anal!sts sa! falling oil prices will ease its current account

deficit' >t the same time, the cost of /ndiaIs fuel susidies could fall ! %"'n this !ear 9 ut

onl! if oil prices sta! low'

14. EFFECTS ON INDIA

The swings in /ndia0) industrial production data in Octoer and 8ovemer suggest the Economic

situation is still uite variale, despite high headline lthough this poses a downside risk to


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ood prices and core prices picked up in .ecemer and while upside pressures on inflation are

e4pected to moderate going forward, the RB/ is likel! to remain ver! cautious aout easing

polic! further M especiall! given the growing risks of fiscal Nslippage0 (that is, the difference

etween the e4pected price of a trade and the price the trade is actuall! e4ecuted at)' Tracing

/ndia0s fiscal progress will e important, ecause the RB/ e4pects fiscal tightening to pla! a ke!

role in restricting upside inflation risks' /n the future, the RB/ is e4pected to continue its efforts

to limit currenc! volatilit! and control the pace of depreciation' The latter, however, could raise

concerns among some polic!makers and manufacturers since, compared with other emerging

market currencies, the rupeeIs depreciation against the :; dollar in "# was relativel! muted'

oreign e4change reserves have een on a declining trend since the eginning of the !ear, as the

RB/ has intervened in foreign e4change markets to limit the rupee0s slide and reduce volatilit!'

;ince the start of "#&, foreign e4change reserves have fallen ! %- n' The risks to

macroeconomic stailit! from such a trend are low' oreign e4change reserves at the end of "#

were euivalent to an estimated 6 months of imports, more than in man! emerging markets' This

was also well aove the -9month threshold considered health! among investors' Reserves

presentl! stand at around %"1 n'

15. EFFECTS ON OPEC COUNTRIES

/ran, ?ene3uela, Ecuador and >lgeria have all pressed OPEC, a cartel of oil producers, to cut

production to firm up prices' >t the same time, /ra is actuall! pumping more, and /ran ise4pected to ecome a ma5or e4porter again'

The! have comined foreign currenc! reserves of less than %"n, and are alread! under

pressure from increased :; competition' 8igeria, which is >fricaIs iggest oil producer, has seen

growth in the rest of its econom! ut despite this it remains heavil! oil9dependent' Energ! sales

account for up to @$ of all government revenue and more than 6$ of the countr!Is e4ports'

The war in ;!ria and /ra has also seen /sis, or /slamic ;tate, capturing oil wells' /t is estimated it

is making aout %-m a da! through lack market sales 9 and undercutting market prices !

selling at a significant discount 9 around %-9& a arrel'

On e' #&, OPEC memers ;audi >raia, ?ene3uela and Latar, along with Russia, announced a

plan to free3e output at current levels' The plan represents a reversal for ;audi >raia in

particular' >s oil prices have slumped, the countr!, the de facto leader of OPEC, has avoided

1


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1. REFERENCES>asim 2' Husain, R' >' (+ul!,"#)' IMF STAFF DISCSSION NOTE!Glo"al I#plicatio$% O&

'o(er Oil Price%) /2'

Bowler, T' ("#, +anuar! #6)' Falli$* oil price%: +,o are t,e (i$$er% a$- lo%er%. Retrieved

from www'c'com http**www'c'com*news*usiness9"6&7-"

+ERE2A >;HDE8>;, >' P' ("#, octoer #)' /o( t,e )S) a$- OPEC Dri0e Oil Price%'

Retrieved from www'n!times'com

http**www'n!times'com*interactive*"#*6*-*usiness*how9the9us9and9opec9drive9oil9

prices'html

DR>:;;, C' ("#&, 2arch @)' Oil Price%: +,at% e,i$- ' Retrieved from www'n!times'com

http**www'n!times'com*interactive*"#&*usiness*energ!9environment*oil9prices'html

Qr 8ewswires, .' +' ("#&, eruar! #)' 'o( Oil Price% Starti$* to /urt Glo"al Eco$o#3! OPEC

Sa3%' Retrieved from www'fo4usiness'com

http**www'fo4usiness'com*markets*"#&*"*#*low9oil9prices9starting9to9hurt9gloal9

econom!9opec9sa!s'html

(# eruar!,"#&)' OPEC Mo$t,l3 Oil Market Report) Organi3ation of the Petroleum E4porting

Countries'

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