Mar 17, 2011|
How long will the oil crisis last?
Ever since oil prices gave crude shock of US$ 100 per barrel this year, the question on everyone's mind is if the trend is sustainable at all. Until the earthquake and tsunami shock in Japan concurrent with China's announcement of a dismal fiscal deficit, nothing could pull oil prices down. Even now, they are at much high level than what fundamentals support.
The oil price scare has given a good talking point to many commodity experts including the likes of Jim Rogers who expects oil to reach US$ 150 per barrel. And then there are some who predict the level up to US$ 200.
Yes, oil is selling higher than it should. But how much of this is based on demand supply dynamics and how much is just an outcome of fear trade. While some premium for uncertainty is justified, we believe that a level above US$ 100 per barrel is way too much and unsustainable. The fundamentals have been ignored to make place for speculations. Every new event - big or small, is jumped upon and made a cause for rise in oil prices.
The unrest in Middle East and North Africa are real. But we also need to understand that such disruptions to oil supply are short term. There is no shortage of oil supply. OPEC is sitting at a spare oil capacity which is higher than late 2008 when oil prices were at all time high. So what is this panic about? Some believe that the crisis may spread to other Middle East oil producers like Saudi Arabia, leading to high prices. We don't think so. And the reason is that this is not new for us. Back in year 2008, oil prices touched historical peak of $145 per barrel. Within three months, the prices were restored to level supported by fundamentals. Do we have a lesson from this event? Yes. The unusually high prices can destruct demand thus turning tables on oil exporting countries. Since most of the Middle East economies rest on oil prices, no internal crisis that threatens oil demand can last for long for the lack of funds. Also, as effects of quantitative measures settle down and rolled back, the dollar should gain strength thus limiting speculative money into commodities like oil.
And that is just one of the factors for restoring parity on oil prices front. As shale gas has entered the energy landscape, oil is no more the single main source of energy. Within last decade, shale gas has managed to raise its share from 0% to 20% of huge gas streams in the US. And this development is important since this energy source has decoupled gas prices from oil prices. In fact, if oil prices rise, it will only speed up developments in non conventional and renewable energy sector. Backhome, the players like ONGC and Reliance have already forayed into such ventures. Unlike oil reserves, which are likely to last barely six to eight decades more, shale gas reserves in India are expected to meet India's requirements for many more years. The shale gas prices have reduced gas prices in US from US$13 per mmbtu to just US$ 4 per mmbtu within four years. This implies a price of US$ 22.2 per barrel of oil equivalent, a level we can hardly ever expect to see for oil (US$ 34.6 per barrel has been the minimum oil prices since 2005).
To conclude, we believe that current levels of oil prices lack the support from fundamentals . It should not be very long before oil prices are restored to normal levels.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407