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Energy: Oil remains cool - Views on News from Equitymaster
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  • Apr 10, 2001

    Energy: Oil remains cool

    Oil prices have dropped significantly since their highs in December '00. The natural resource had touched new ten-year highs of $35 / barrel (Brent blend) and $37 / barrel (WTI blend). Over the past quarter Brent crude prices have fallen by 28.6% to $25 / barrel and WTI is down 27% to $27 / barrel.

    In FY00, the Organisation of Petroleum Exporting Countries (OPEC) increased production of oil by 3.2 m barrels per day (mbd). The hike in supply was to counter the high consumption winter months in the Northern Hemisphere, which lead to run away oil prices that were breaching previous highs.

    OPEC Production
    Country Earlier Output Output Cuts New Outputs
    Algeria 827,000 79,826 747,174
    Indonesia 1,343,000 129,633 1,213,367
    Iran 3,800,000 366,795 3,433,205
    Kuwait 2,077,000 200,483 1,876,517
    Libya 1,388,000 133,977 1,254,023
    Nigeria 2,132,000 205,792 1,926,208
    Quatar 671,000 64,768 606,232
    Saudi 8,415,000 812,259 7,602,741
    UAE 2,263,000 218,436 2,044,564
    Venezuela 2,984,000 288,031 2,695,969
    Total 25,900,000 2,500,000 23,400,000
    Figures in mbd

    As the Northern Hemisphere comes out of the winter months into the slack consumption summer period the increased production would lead to an over-supply situation with consequent correction in prices. To balance demand and supply the OPEC cut production by 1.5 mbd in mid January. They cut production again by 1 mbd on March 17 to shore up oil prices.

    However, despite the cuts, prices have remained at current levels, as the markets factor in the possibility of a global economic slowdown and reduced oil demand in calendar year 2001. With the two largest oil consuming nations, U.S and Japan, headed towards a recession we could see crude oil prices weaken further by the end of summer.

    To protect their turf, the OPEC is not averse to cutting oil production yet again and we could see another cut this summer, as the OPEC meets next in May. The current production cut was to come into effect in April and markets await data to check whether the members of the cartel are adhering to the new quota limits. Markets suspect that discipline among the members is weakening and this could be another reason for the cool down in oil prices.



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    Aug 23, 2017 10:46 AM