Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Energy: Cartel in catch22 - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 25, 2001

    Energy: Cartel in catch22

    It's been volatile times for oil markets over the past fortnight. Prices of the commodity skyrocketed to a 9-month high of $31 / barrel on news of the terrorist attacks. Since then, prices have cooled down to $26 / barrel. But nervousness still persists, as retaliatory action against Afghanistan could adversely affect oil supplies.

    Life of oil traders has been made more difficult, as forces pull the markets in diametrically opposite direction. The possibility of military action against suspected terrorist outfits, which are mainly holed up in the Middle and Central Asian region could disrupt oil supplies. Consequently, oil prices would tend to remain firm. On the other hand, the attacks have only accentuated the weakness prevailing in the global economy leading to softening in oil prices, as demand declines. These contrasting variables could lead to a banding market with poor visibility over the near term.

    That said, one can expect retaliatory action to be a longish term exercise and not necessarily in the form of military action. First salvos could take the form of crackdown on terrorist financial network and intelligence infrastructure. Meanwhile, the sliding global economy could continue applying downward pressure on oil markets. Consequently, tilting the balance in favour of softer prices. In fact, on the same reasoning, oil prices fell sharply yesterday touching 17-month lows before closing at $23.2 / barrel (Brent blend).

    World Oil Reserves
    (bn barrels) 1989 1999 2000
    OECD 119.1 85.9 84.8
    OPEC 764.9 802.5 814.4
    Others 188.4 166.2 166.7
      1,072.4 1,054.6 1,065.9
    However, the Organisation of Petroleum Exporting Countries (OPEC) has adopted an oil pricing mechanism to maintain prices in the band of $22/ barrel to $28/ barrel by adjusting production with preferred pricing of $25/ barrel. With a weakening global economy the cartel cut output thrice this calendar year by an aggregate 3.5 m barrels / day (mbd) to support oil prices. The latest cut of 1 mbd came into effect in September '01. As per OPEC estimates, for 2002, non-OPEC production is expected to be 49.2 mbd, which indicates OPEC production is expected to meet 35.6% of global demand. In the current environment the cartel also faces a conundrum, as key members having forged alliance with U.S may not be able to support a production cut. Tightening the taps in this delicate environment could label the cartel, once again, as 'price hawks'.

    The table indicates the increased dependence of the global economy on OPEC supplies. In fact, reserve life expectancy is heavily skewed towards OPEC. While non-OPEC reserves have an estimated life of 12.3 years, OPEC oil has a life of 74.3 years. This suggests ominous overtones for the world economy. Consequently, foreign policy of nations could be designed to address this issue.



    Equitymaster requests your view! Post a comment on "Energy: Cartel in catch22". Click here!


    More Views on News

    GAIL: A Good Show (Quarterly Results Update - Detailed)

    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.

    ONGC: Higher Realisations on Crude Support Performance (Quarterly Results Update - Detailed)

    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.

    Oil India Ltd: A weak quarter (Quarterly Results Update - Detailed)

    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.

    GAIL: A Robust Quarter (Quarterly Results Update - Detailed)

    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.

    ONGC: Lower Write-offs Support Performance (Quarterly Results Update - Detailed)

    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

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)