Wednesday, October 29, 2014

CRUDE AT $120 WITHIN MARCH 2015

We are all jubilant about the crude prices have come down to $85 and it’s expected to come further below as per reports of the big giants of the world market. But I find the crude prices to shoot up to $100 by December and $120 by March 2015. Low crude prices theory is based upon that Europe, US and China are under the phase of slow down and hence there is not much demand as compared to the productivity.

Well these theories are good for academics but not for intelligent animals. Low crude prices are no doubt beneficial to the Emerging economies who are importer of crude like India. Surplus funds from low crude prices leads to investments in progressive segments but the game is for a very short lived phase. Many people have now thrown the question on RBI about cutting down interest rates as crude prices are low and hence fiscal deficit is coming down further Indian economy is entering into the proper channel of FRBM .I find RBI has negligible position for cutting down interest rates. We must not forget that THE collapse of the Soviet Union in 1991 had many causes but the prime among them was the fall in the price of oil, its main export, by two-thirds in real terms between 1980 and 1986.
  •  Iraq, Syria, Nigeria and Libya, oil producers all, are in turmoil as the price of Brent crude fell over 25% from $115 a barrel in mid-July to under $85 in mid-October.
  • With oil at $115 a barrel, Saudi Arabia earns $360 billion in net exports a year; at $85, $270 billion. Its budget has almost certainly gone into the red
  • Venezuela’s-Every dollar off the price of a barrel cuts roughly $450m-500m off export earnings. By Deutsche Bank’s calculation, the government needs oil at $120 a barrel to finance its spending plans—higher than before the recent tumble.
  • Iran needs oil at $136 a barrel to finance its spending plans,
  • Brazil wants a high oil price to attract investment to its ultra-deep offshore (pré-sal) oil reserve
Hence its well clear that world economy would be facing more slowdown if the prices of crude falls to below $85 level. Now the cold war between Russia and US is now quite visible. US is playing with crude since its increasing its production so as replace the entire middle east by 2018 and that to save the dollar from getting replaced as a reserve or trading currency in the coming years. It’s a threat for which US is aggressively producing crude. China and Russia are doing internal trades based on their own currency and avoiding dollar. Now we all know that Russia exports crude in exchange of food items and other necessary consumption based items. Now with the present level of crude of $85 leads a significant threat to the economy in the long term. Moreover with winter season in Russia creates huge market of demand for food and other consumption items. Hence Russia would find intense difficulty.

Sovereign funds size of the Middle East and Arab world in terms of exporting of crude has swollen to a mammoth level. This is a threat for the US and European economy as the biggest question of funding of various militants group is question of trillion dollars.  For me this is an assumption and the best reply for the same lies with my readers.  The most astonishing part is that Libya has started production of crude despite of so many tension raises the eye brows of billions. Libya would somehow be pumping 40% more oil at the end of September than it had just a month earlier? Supply rises by 810,000 bpd, led by Libya On the other hand Saudi Arabia’s decision to boost output to protect its market share and hurt American shale producers and see off new developments in the Arctic was also a big shocker.

Further Russia has aggressive planning for its military and defense and the funding of the same is dependent on the crude export at the price of $130.

We Indian needs huge amount of storage facilities where cheap[ crude can be stored and can be consumed later on which will also give the biggest advantage to the Indian economy when crude prices increases in the international market where as India could enjoy a low price particularly for the agricultural sector. We need to plan storage facilities and develop alternative energy for the agriculture sector so that we can get out of the clutches of the crude prices. The recent report of the big cats of the world market that crude prices can come down to the level of $75 has been said since  in the US, the weighted average marginal cost of crude production at the shale-dominated onshore plays is about $73/b. Hence they are not making a loss. Further the report have been released since they want the world market to create massive short position in the near term and make zoom up rally in the long term something which happened to gold during Feb-2013. Another big winner, paradoxically, will be the U.S. oil industry. Fears that the price plunge will force cutbacks in production appear very premature. In fact, if Congress gets its act together and lifts its forty-year old ban on oil exports, we could actually see a spurt in production.

The other big winner will be the U.S. consumer. Americans are already seeing the impact at the pump, with gas prices averaging $3 a gallon. If the price of Brent crude falls to 80 dollars a barrel, that’s the equivalent of a $600 annual rebate for every American household  and a $1.8 billion daily windfall for the world economy.

US economy will face slowdown and Europe too but do you think that Indian markets and economy would grow particular the ones who are dependent on export. Moreover these developed economies knows very well that if crude prices goes up to the level of $120 then inflation will swell and interest rates would not come down and rupee as well as economic growth will be under intense pressure to grow. Hence the best way to create problems for this new government and economy is crude prices. Hence its quite easy to derail the growth plan of the present government and bring slow down. This is why we need huge storage facility and also intensive growth for alternative energy particularly to the solar sector.

This month's output is OPEC's highest since November 2012 when it pumped 31.06 million bpd, according to Reuters surveys. Involuntary outages, such as in Libya, kept output below OPEC's nominal 30 million bpd target in earlier months of the year. Iraq, like Libya, has also managed to increase supplies despite fighting in the country. Oil output rebounded due to higher exports from Iraq's southern terminals and increased output from fields in Kurdistan. An advance by Islamic State fighters nearby crude wells is an significant threat for the crude to grow.
After reading the affects about the losers due to the falling crude prices do you think that they will remain silent’s and will not do anything where crude will shoot up to the level of $120. A return to sub $100/b oil also comes as oil executives confront growing investor calls for more capital discipline to defend revenues against ballooning oilfield service bills. Creeping industry costs and fast-growing costs of accessing more remote, complex sources of oil and gas and have played a key role pushing breakeven costs perilously close to current oil prices. The London-based group said that collectively, the world’s oil majors are looking at a potential capital spend of $548 billion over the period 2014-2025 on projects that require a market price of at least $95/b. Hence if oil companies start losing billions then unemployment would increase which will create massive prolonged slow down. Do you think that these exporting economies would afford that at the cost of low crude prices?

The battle is now between US and Russia and Middle East countries who export crude. This is further proved from the latest US air strikes in Syria targeted oil facilities controlled by Islamic State (Isis) in a deliberate attempt to wipe out a lucrative source of income for the rapidly expanding jihadist group. The Islamic State, which now controls an area of Iraq and Syria larger than the U.K., may be raising more than $2 million a day in revenue from oil sales, extortion, taxes and smuggling, according to U.S. intelligence officials and anti-terrorism finance experts. The Islamic State is probably the wealthiest terrorist group we’ve ever known,” said Matthew Levitt, a former U.S. Treasury terrorism and financial intelligence official who now are director of the counter terrorism and intelligence program at the Washington Institute for Near East Policy. Hence that’s the reason why crude prices are coming down but the biggest question is that how long the price will be falling. The war for Crude is cruel and I fear India should not get burnt. That’s the reason I am focusing and urging more on increasing the storage facility of India for crude.

According to the Iraq Energy Institute, an independent, nonprofit policy organization focused on Iraq’s energy sector, the army of radical Islamists controls production of 30,000 barrels of oil a day in Iraq and 50,000 barrels in Syria.By selling the oil on the black market at a discounted price of $40 per barrel (compared to about $93 per barrel in the free market), ISIS takes in $3.2 million a day.

 My point is that why we should get into this problem and why not aggressive look for freeing up the agri-sector from the dependency of oil and focus on solar power.US is squeezing up Russia and Middle East so as to cut down the funding. Now do you think that RBI will cut down interest rates and take the hit later for rising crude prices?

We should build huge reserves/storage of crude at these low levels and also work hard to develop solar power energy based energy supply for agri-sector to control the affect of rising crude prices.Also remember that what ever losses happens today will be coped up in the long term.So their is less space to smile.

2 comments:

CMA Santosh Pant

Thanks, Indernail for enlightening us with the broader views about the international prospects.

Shawn

is this still the though ?

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