1. ‘Oil would be better off remaining just volatile’

‘Oil would be better off remaining just volatile’

Oil looks to be in such a goldilocks space now. Can’t fall much, can’t rise much either.

By: | Updated: August 11, 2016 1:02 PM
CRUDE OIL From the lofty peaks of 0 a barrel, oil’s fall in the last few years has not only been steep and sustained, but has drastically cut the expectations of seeing 100 again, possibly forever. (Reuters)

Crude Oil prices falling. Yeah, again. So, it is good then? Hard to say. Oh, it is bad eh? Hard to say.

Well… before questions queue up, let us take a quick look at what is happening now.

From the lofty peaks of $100 a barrel, oil’s fall in the last few years has not only been steep and sustained, but has drastically cut the expectations of seeing 100 again, possibly forever. Surprising, because oil is still a non renewable fuel resource, as it takes thousands of years to be made available, and hence, at the prevailing rate of consumption, we are looking at complete exhaustion of oil sources in the very near future. Unless of course, we have found a cheaper alternative. But then, not only have we found a commercially viable alternative recently in Shale Gas, but a coincidence of a few seemingly unrelated events distorted the supply picture, and have triggered a cascading effect on oil prices. US lifted a 40 year old export ban, Iran’s exports which have until recently been denied due to embargo, became available, OPEC, a cartel meant to support prices, continued to pump higher than agreed limits, and traditional suppliers which were focussing on US alone, started to compete in Asian markets as well. To top it all, global economies look to have slipped into recession, depressing global oil demand. And, if one were to believe the conspiracy theories doing the rounds, then the Saudis, with the second largest oil reserves in the world, are refusing output freeze and allowing low prices in order to kill competition from Russia and Iran.

Meanwhile, supply disruption in Canada due to forest fire and rebel attacks in Nigeria did manage to briefly prop up prices, but all that now looks to be temporary events and just minor blips in an otherwise long term bear market.

So, what’s with “Goldilocks” and oil?. Wikipedia says that according to goldilocks principle, a planet must neither be too far away from, nor too close to a star and galactic centre to support life, because either extreme would result in the planet incapable of supporting life.

Oil looks to be in such a goldilocks space now. Can’t fall much, can’t rise much either.

Low oil can be good for fuel thirsty emerging economies, but spells doom for even developed economies that depend on oil boom for capital investment. A New York Times report said that scores of companies have gone bankrupt and an estimated 2,50,000 oil workers-roughly half in the United States- have lost their job. High oil price is important for some countries whose budget is based almost entirely on oil exports, but there is also a belief that windfall gains from high oil prices fund terrorism.

Looks like, oil would be better off remaining just volatile. Yeah, volatile is good.

(The author is Chief Market Strategist, Geojit BNP Paribas)

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