oil market Paper

Published: 2021-09-13 08:25:10
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Category: Climate Change

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? In a low oil price environment, margins on retail fuel compares favorably to margins on FO. This along with linkage of margin on retail fuels to CPI has resulted in higher incentive for selling retail fuels. Players with increasing proportion of retail sales are likely to post greater profitability growth, going forward.
? The decline in oil prices since June’2014 and subsequent volatility has posed a challenge for industry players with effective inventory management and hedging becoming increasingly important to manage inventory losses. Going forward, oil prices are forecasted to remain relatively stable (within the $40-$50 band) during FY17 which may limit any significant inventory losses and build up in circular debt for OMCs.
? Financial profile of the sector is satisfactory with manageable leverage indicators and adequate cash flows. Profitability of the sector is expected to improve with volumetric growth in retail sales, improving gross margins (margins linked to CPI and change in sales mix) and lower inventory losses.
Global Oil Markets – Current Developments and Future Prospects:-
? It is important to be clear about causality; it is supply and demand imbalances that cause stocks to rise and for the shape of the curve to switch to contango.
? High levels of stocks will continue to put downward pressure on the oil price and on time spreads. Until stocks are drawn-down, any potential price recovery will be capped.
? Most pressure will be felt on light sweet crudes and on the Brent structure given that the North Atlantic (ex-US) has become the clearing destination for light sweet cargoes.
? The perception of the loss of supply feedback to clear markets affects market sentiment, increasing volatility and increasing the risk premium in investment in energy projects.
? Clearing excess supplies through supply and demand adjustment to lower prices is subject to uncertainty and lags.
? So far demand growth has done most of the work, though it has not been strong enough to absorb the entire glut.
? OPEC & non-OPEC both groups will be enter in the market & competition will be very tough probably, the prices of the oil will be reduced.
Oil Price Forecast 2025 and 2050:-
The volatility in oil prices makes it difficult to precisely forecast them. But the EIA has bravely done so. It forecasts that, by 2025, the average price of a barrel of Brent crude oil will rise to $81.73/b. This figure is in 2018 dollars, which removes the effect of inflation. By 2030, world demand will drive oil prices to $92.98/b. By 2040, prices will be $105.16/b, again quoted in 2018 dollars. By then, the cheap sources of oil will have been exhausted, making it more expensive to extract oil.
By 2050, oil prices will be $107.94/b, according to Table 1 of the EIA’s Annual Energy Outlook. The EIA has lowered its price estimates from 2017, reflecting the stability of the shale oil market.
By the end of 2019, the United States will become a net energy exporter, exporting 1.1 million barrels more than it imports. It had been a net energy importer since 1953. Oil production will rise until 2027 when it levels off at around 30 million b/d.
The EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the economy grows around 2% annually on average, while energy consumption increases 0.4% a year. The EIA also has predictions for other possible scenarios.
How Oil Prices Could Rise Above $200 a Barrel
Oil prices reached a record high of $145/b in 2008 and climbed to $100/b in 2014. That’s when the Organization for Economic Cooperation and Development forecast that the price of Brent oil could go as high as $270/b by 2020. It based its prediction on skyrocketing demand from China and other emerging markets.
Prices this high seem unlikely now that shale oil has become available. It’s also unlikely as the world shifts to renewable energy as a way to combat global warming. Oil and gasoline contribute to greenhouse gases that lead to climate change.
The idea of oil at $200/b seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250/b for years due to high taxes. That didn’t stop the EU from being one of the world’s largest oil consumers. As long as people have time to adjust, they will find ways to live with higher oil prices.
The year 2020 is less than a year away, but look at how volatile prices have been in the last 10 years, ranging between $26.55/b and $145/b. If enough shale oil producers go out of business, and OPEC teams up with Russia to form a global cartel, prices could return to their historic levels of $70-$100 a barrel. OPEC is counting on it.
The OECD admits that high oil prices slow economic growth and lower demand. High oil prices can result in “demand destruction.” If high prices last long enough, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years. They finally collapsed when demand declined, and supply caught up.
Oil speculators could spike the price higher if they panic about future supply shortages. That’s what happened to gas prices in 2008. Traders were afraid that China’s demand for oil would overtake supply. Investors drove oil prices to a record $145/b. These fears were unfounded, as the world soon plunged into recession and demand for oil dropped.
Keep in mind that any perceived shortage can cause traders to panic and prices to spike. Perceived shortages could be caused by hurricanes, the threat of war in oil-exporting areas, or refinery shutdowns. But prices tend to moderate in the long term. Supply is just one of the three factors affecting oil prices.

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