Download Unfolding Dynamics of the Global Oil Market

EIU Research Note | January 2016
Unfolding Dynamics of the Global Oil Market
EIU
Unprecedented fall in global oil prices, now hovering at around US$ 30/barrel, are at levels not seen since 2003
In 2015, global crude oil supply grew by a staggering 2.6 million barrels a day
During 2016, oversupply likely to hit around 1 million barrels a day
Main drivers of continued low prices are: high supply from OPEC countries to maintain market share; continued supply
from unconventional oil producer – the US – of shale oil and gas; new production coming on stream from Iran; and
impact of slowdown in China
The impact on Sri Lanka is two-fold – both positive and negative
Our forecast is that oil will remain between the US$30-40 barrel mark for much of 2016, with fluctuations based on:
the extent of Iranian supply; demand changes based on recovery of the global economy (particularly large producers
like China); and any change in strategy by OPEC.
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- Impact on Sri Lanka
1. Positive
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As a 100% oil importing country, Sri Lanka will benefit hugely from low oil prices throughout 2016 and much of
2017, and in the midst of a LKR depreciation, this comes as welcome respite for our Balance of Payments
Provides unique ‘breathing space’ for the government to undertake much overdue energy sector reform, including
introducing a robust pricing formula, which is harder in a high oil price environment
2. Negative
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Some of our major export destinations for tea – Middle East and Russia - are suffering from lower commodity
(including oil) prices and this has reduced their demand for our exports, which has and will continue to have an
adverse impact on our balance of payments
Sri Lanka depends heavily on remittances to bridge the trade deficit (finances approximately one-third of our import
bill), and the budgetary strains in the Middle East oil exporting countries and negative wealth effects will hurt
remittances. Year-on-year remittance growth has been continuously slowing since mid-2013, and by end of 2015 had
slowed to just 5%.
- 4 drivers of global oil dynamics
- US
a. Shale oil/shale gas/tight oil revolution - technological advances have been fracking technology (hydraulic fracturing)
feasible
b. Led to a rise in shale rigs and US becoming self-sufficient in energy, reducing reliance on imported oil
c. Amidst lower oil prices, shale rigs (which are higher marginal cost producers) have had to consolidate, but still
remain competitive
d. US also recently (Dec 2015) lifted a 40-year long ban on exports of US crude oil resources
- Saudi Arabia and OPEC
a. OPEC struggling to maintain market share amidst falling prices and new suppliers
b. Keeping supply high and prices low in order to maintain market share and try make US shale uncompetitive
c. Saudi Arabia facing budgetary crises as generous welfare spending up to now has been financed with oil revenues
during high price era
d. Annual budget deficit of over $100 billion has force the country to liquidate over $90 billion of foreign assets in
the past 12 months to bridge the gap
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e.
In a sign of further stress, Saudi Arabia recently announced it is seeking to sell part ownership of its state-owned
oil company, Saudi Aramco
- Iran
a. Sanctions on Iran had hit its oil production and export, but with the sanctions being removed Iran is set to
become a major oil exporter once more
b. It had been preparing for months to be ready for the lifting of sanctions, and has already begun ramping up
production
c. It is likely that Iran will pump nearly 1.5 million barrels a day by end of 2016
d. Already the daily excess demand in the global oil market is close to 1 million barrels
- Slowing Global Demand
a. China’s export and investment-fuelled growth drive has been a big reason for the high demand for commodities,
including oil
b. With a slowdown in the Chinese economy, oil commodity futures have seen lower prices as demand for oil is likely
to slow down
c. Slowdown in other major economies like Russia and Brazil and has also pushed down demand in recent quarters
d. Milder winter temperatures in Japan and Europe has also contributed to downward pressure on oil demand
Prepared by Anushka Wijesinha, Chief Economist,
Economic Intelligence Unit (EIU)-The Ceylon Chamber of Commerce.
[email protected]
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