The remarkable rout of crude oil has continued unabated into the New Year. From $115 a barrel in mid-June last year, Brent crude has crashed relentlessly and is now down more than 60 per cent. It fell below the psychologically crucial level of $50 a barrel in the first week of January. This roiled financial markets across the world due to fears of a global deflationary scenario. The fuel has only fallen further since and currently trades at about $46 a barrel. The Indian crude oil basket has also fallen to about $45 a barrel now, a level last seen in early 2009.

The factors underlying the capitulation of crude oil — weak global demand, especially in China and Europe, increasing global supplies, mainly US shale oil, and the refusal of the dominant producing group OPEC to cut output to support prices — still hold.

Reports of strong output growth in Iraq and also in cash-strapped Russia added to the pressure; so did the lower global economic growth forecast by the IMF. Speculators betting on crude oil’s rebound may have been caught on the wrong foot, leading to panic sales and exacerbating the downward pressure on the fuel. Saudi Arabia, the most influential member of OPEC, saw a change at the top with King Salman taking over after the death of King Abdullah. But this is unlikely to change the country’s stance of maintaining its market share at the expense of price. If the price slide continues at the same pace, Brent could soon plumb the lows of $34 a barrel seen in December 2008 when the global financial meltdown was playing itself out.

Mug’s game

That said, trying to predict crude oil prices can be a mug’s game. One, deep-pocketed low-cost producer Saudi Arabia’s alleged policy of a race to the bottom to make it unsustainable for US shale oil producers may be nearing end-game. WTI crude (the US benchmark) has also dipped below $50 a barrel (currently $45); at this level, many shale oil producers will be feeling the pain. Ergo: closures which might provide support to global crude oil prices can’t be ruled out. But this could take time with indebted US operators giving precedence to cash flows over profitability in the near term. Still, new investments in shale seem unlikely at current price levels.

Also, the big-ticket stimulus by the European Central Bank could add to global liquidity and support crude oil price.

With counter-weighing factors, Brent crude is likely to be range-bound in the $40-50 a barrel range in the near term. Downside from current levels may be limited, while a rebound may take time.

Related Topics
comment COMMENT NOW