A bird’s eye view on “Black Gold”

There has been a lot of chatter concerning the global oil market and the ‘crisis’ it is facing. Overnight, US crude oil (WTI) fell by more than 3% while Brent crude oil danced around 11 year lows. Brent crude oil yesterday stood at $36.61 a barrel while the WTI stood at $36.81 a barrel. Comparing to previous lows in 2004 of $35.98 for the Brent while the WTI hit a low of $32.40 in 2008.

To put it into perspective check out the chart below, between January 2014 and January 2015. Now, picture yourself as an oil investor/producer – I would personally be having a breakdown right about now.

WTI-and-Brent-latest6

The oil market is currently bearish and I expect this trend to continue within the first half of 2016 (by God’s graces it may only continue till the first quarter of 2016)  and thereafter stabilize and hopefully improve.

I am no expert (though this market intrigues me) but I expect the oil market to continue declining due to the following:

  1. The expectation that sanctions on Iranian oil exports (as part of its nuclear deal) will be lifted during the first half of January. This will significantly increase oil supply during this glut.
  2. There have been notable declines in major oil consuming countries such as Japan and China and I expect this to continue until those economies improve. Also, this year has seen a decline in many global economies and as such those economies have been unable to maintain their oil demand levels further lowering demand below supply. I believe, we should see markets rebounding in the second half of 2016 which will be a welcome “Hello” to the oil market.
  3. The US is currently the largest crude oil producer. It does not export its crude oil meaning it does not add onto the glut with its reserves. It however directly impacts the demand of oil imports into the country. With its increasing internal supply, there has been a decline in the amount of oil imports into the country thus adding onto the glut through declined export demand.
  4. Market share war. This is the battle of the fittest. The US and Middle East continue to fight (literally) for market share despite lower prices. Why? The strongest will move the market and thus be able to control market prices in the long run. In the past, the benchmark oil index has been able to ‘fix’oil market prices to benefit them. The Iranian oil minister was quoted in The Wall Street Journal (WJJ) saying, “Our only responsibility here is attaining our lost market share and not protecting prices.”Clearly, if Iran does come into the market I expect a further decline in oil prices as market share wars continue to prevail.
  5. Speculation. I debated whether to put this point up or not. The world is and has changed. The law of demand and supply is losing its practicability (but not its importance in explaining market trends). Speculation is fuelled by expectation and thus influences market trends. For the past year, the expectation in the oil market has been negative especially driven by the expected increase in oil supply due to Iran’s oil sanctions being lifted.

During the second half of 2016, I expect to see the oil market improve. Why? Oil producers would choose to wait for the sunshine even through this storm. Producers like Saudi Arabia are the largest oil exporters and have the financial capabilities to ‘wait it out’. Producers will also be looking for ways to improve profitability at the lower prices by improving efficiency and re-strategizing.

It can also be debated that the oil market could ‘balance out’ due to the decline in the US oil supply. Currently, US oil supply is plateauing and is expected to decline in 2016. This means that there is opportunity for oil imports to meet the US demand gap at this stage. I also found out that many of the new reservoirs in the US produce heavy oil of which their refineries were not built to handle. This would mean the US would have to heavily invest in their refineries so as to not let the oil go to waste. Until this is done, I expect that supply will continue to dwindle benefiting the overall global oil market.

There you go, my bird’s eye view of the oil market. If you have any questions or would like to add onto this – feel free to comment or email me on hotbloodedbusiness@gmail.com.