You are here: Home » Markets » Opinion
Business Standard

Caught in a vortex of panic in a sea of oversupply

The fundamentals of oil decidedly took a more bearish turn on the imminent new tide from a sanctions-free Iran, even as global demand growth lost steam towards the end of 2015

Vandana Hari 

Vandana Hari

Benchmark Brent crude surrendered 18 per cent of its value in the first 16 trading sessions of 2016, adding on to the previous year's 34 per cent rout, and touching 12-year lows in a tailspin that prompted some to predict a $10/barrel bottom. This may be overly pessimistic. But in a vortex of fears over the global economy, jitters over Chinese growth and panic-stricken equity markets, it is hard to see what lies ahead.

The fundamentals of oil decidedly took a more bearish turn on the imminent new tide from a sanctions-free Iran, even as global demand growth lost steam towards the end of 2015. The pace at which the additional one million barrels per day supply flows out is almost immaterial; every incremental barrel will slosh on top of an already oversupplied market. The International Energy Agency predicts global oil stocks will rise about 285 million barrels through 2016, an addition of around 780,000 barrels per day on average.

The investor stampede for the exit door that wiped off more than $3 trillion from global equity markets within the first two weeks of 2016 also reverberated through commodities, given the uncertainty over China. China recorded the slowest real GDP growth in 25 years in 2015 at 6.9 per cent. Its energy intensity seems to be declining even more rapidly.

Weighing on the supply side, Iran, which has embarked on a diplomatic charm offensive, signed its first European crude deal of the post-sanctions era with Greece's biggest refiner Hellenic Petroleum within days of lifting the sanctions, providing for an 'immediate start' in supplies.

Brent's plunge below the $30/barrel threshold mid-January prompted renewed clamour from some of OPEC's more cash-strapped members, prominently Venezuela and Nigeria, for an emergency meeting. Subsequent reports that the world's two largest producers Russia and Saudi Arabia were planning a meeting early February to discuss the possibility of production cuts, briefly raised hopes that were mitigated by the realisation that an Opec-non-Opec pact would need Iran to reduce rather than raise its output, which seems a near-impossibility.

Given the continued stand-off between supply and demand, producers around the globe are hunkering down for prolonged pain. Oil-rich governments in West Asia are slashing public spending, borrowing money, raising taxes, and removing subsidies. The Russian ruble hit historic lows against the dollar in January, while Venezuela is predicted to suffer the worst recession on the globe in 2016. Continued blood-letting in the corporate world will see further job and upstream capex cuts at oil and gas producers and service providers.

So what gives? The world is waiting for US production to cave in. The US Energy Information Administration forecasts domestic production will decline by about 700,000 barrels per day this year to an average 8.7 million barrels per day, as $30 oil drives more shale producers out of business and bank loans start drying up. If true, 2016 will reverse the US' relentless growth trend of the past eight years. But that will not suffice; the market can be expected to exact a much bigger price to rebalance.



The author is editorial director of Platts and Research Scholar, McGraw Hill Financial Global Institute

First Published: Sun, January 31 2016. 23:07 IST
RECOMMENDED FOR YOU