Jan 8, 2007|
Crude Oil: More than demand and supply...
Crude oil is one of the most volatile commodities in the world. Continuing with its basic traits, it was highly volatile in 2006, with fluctuations of almost US $20 per barrel. Market participants focused attention on bullish non-fundamental signals and downstream bottlenecks, after which bearish factors in the form of crude oversupply and easing geopolitical tensions shifted attention to market fundamentals, leading to a sharp correction in prices of 27%. While prices have recently regained some of the lost ground, the question of whether prices will stabilize remains far from settled.
Crude oil is the engine that propels the world economy, thus economists and analysts track its movements in order to arrive at a correct picture of the growth in economy and the corporate sector. There are a whole host of factors that affect crude oil prices, apart from demand and supply. Conflicting political, geographical and economic factors are also key determinants of the crude oil prices. Geopolitical risk premium, which was as high as US$ 20 to 25 per barrel at the peak price of US$ 75 per barrel, has recently eased to US$ 10 to 15 per barrel at the current price. This non-fundamental component has a sizeable impact on crude oil prices and while it is extremely difficult to quantify the same, it is largely dependent certain geopolitical factors like insurgencies, terrorist activities and hostile conflicts. Against this backdrop, we have made an attempt to outline the distribution of the world proven oil reserves and our interpretation of the same.
Composition of the world proven reserves
* More than 100 years.
||At end 1985
||At end 1995
||At end 2004
||At end 2005
|| Share of total
|Total North America
|Total S. & Cent. America
|Total Europe & Eurasia
|United Arab Emirates
|Total Middle East
|Total Asia Pacific
The above table reveals that Middle East has the largest proven crude oil reserves in the world (62% of the total reserves) followed by the African continent that accounts for as much as 9.5% of the world proven reserves. The level of political risk in some of these countries is significantly higher, thus any political unrest puts crude oil prices under significant pressure. With oil companies in these regions mostly government owned, the process of the exploration and development of the reserves also tends to be on the slower side.
If we further analyse the proven reserves on a country basis, Saudi Arabia accounts for a huge 22% of the world proven crude oil reserves, followed by Iran (11.5%), UAE (8.1%), Kuwait (8.5%), and Venezuela (6.6%). Iraq, one of the most volatile regions in recent history, accounts for 9.6% of proven oil reserves.
What has kept the risk premium higher?
Iran along with Iraq accounts for 18% of the world's proven oil reserves. Both these countries are currently in the center of a huge political storm, thus jeopardizing their oil development plans. In a strong reaction to these events, oil prices had run up from US$ 65 per barrel to as much as US$ 78 per barrel. More importantly, the above numbers are proven reserves, which still need to be developed to a significant extent, thus warranting a stable political environment. While spare production capacity has declined considerably on the back of increased demand from developing countries, heightened political activities have not allowed production to keep pace with demand, thus putting further pressure on prices. Such is the concern that our interaction with one of India's biggest shipping companies, revealed the fact that roughly 10% of the global crude oil requirement is being kept on board in floating vessels in the sea to ensure supplies in case of any conflict escalation.
While we are not experts of the world political affairs, we do not foresee any significant easing of the current political scenario. Thus, in order to counter risk associated with crude supply, short-term solutions, like the strategic oil reserves (SOR) have been resorted to by the major consuming countries. After the terrorist attacks in the US in 2001, it resorted to strategic oil reserves. The same is being implementing by India as well, with strategic oil reserves expected to be in place upto 2010.
To conclude, we believe, crude oil prices are expected to scale-up from the current levels due to fundamental factors in the long run, while in the short run, non-fundamental factors will keep the volatility levels higher.
More Views on News
Mar 27, 2017
GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.
Mar 17, 2017
ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.
Jan 24, 2017
Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.
Dec 3, 2016
GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.
Nov 3, 2016
ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407