Currently, the world is awash with crude. The global supply exceeds demand by 1-2 million barrels per day. This has led to more than 60% decline in crude prices over the last 2 years. This bear phase started with the shale revolution in the US that challenged the peak oil theory and proved that there was lot more oil that could be drilled across the globe. This got Saudi Arabia worried and to maintain market share, it shed the traditional role of a marginal producer. Rather than reducing production to control prices it started pumping further to gain the market share. This led to a rapid decline in prices of oil.

As this happened, Iraq was increasing production after recovering from years of war. Russia also increased production to get as much revenue from oil as possible. And while most experts expected production in the US to slow down because of sluggish prices, the market has remained resilient with production dropping merely by about 0.5 million barrels per day (after increasing for the first year).

While all this was happening, Iran sanctions were being lifted and the Iraqi authorities claimed that they will flood the oil market with additional 1 million barrels per day.

All these development meant that prices continued free fall and reached multi-decade lows and $20 a barrel oil started looking like a possibility. Then we heard that countries like Saudi Arabia and Russia put aside their differences to come together to freeze production. Some read this as a signal of new era of OPEC/Non OPEC co-operation which could control supply and therefore increase prices.

However, it was just a production freeze and not a production cut. Saudi and others are already producing at levels close to their historical highs. In last 40 years, Saudi has only produced more than the current production for about 2 years. Russia is also producing at close to all-time high. Therefore, freezing production at those levels does not really help in controlling supplies. Reduced output from Siberian fields and increased Russian taxes mean that there isn’t a lot of funds that can be invested in increasing production in Russia.

Moreover, Saudi may have approximately 1 million barrel of spare capacity which can further increase supplies but they will keep this as buffer for supply shocks. So the production freeze will not change anything they are already doing. They were not planning to increase production above these levels and they will not reduce production either. Even more so, as Iran has suffered for years due to sanctions it will not play ball on any production freezes. They will look to aggressively ramp up production by about 1 million barrels a day this year. Iraq has also asserted that it will only freeze its plans as of January 2016.

As those plans included increasing production steadily, Iraq will continue to pump out more and more oil. Countries like Saudi Arabia and Iran can produce oil profitably at these levels and do not intend to cut the production to subsidise the costlier producers.

This along with record inventory levels will keep prices low in the medium term. US stockpiles of over 500 million barrels are already at 80-year high and a large number of drilled, but yet not completed, shale wells which can produce on short notice provide a big buffer for any upward movement in prices. This is why most experts expect prices to remain in the $25-$45 range for a while.

The big things that can change this equation are:-

-Debt defaults by producers: – As per Bloomberg survey, drillers lapped up $237 billion of loans to fund their shale adventures and now with crude prices down significantly, a number of them will struggle to make payments. Last month, 2 drillers with a combined $7.6 billion of debt, didn’t pay interest on their bonds. This could be only tip of the iceberg with another debt crisis in the making. This is one of the key reasons why financial markets have been so co-related to oil in the recent past.

-Geo-politics on Syria and other contentious issues could increase or decrease co-operation among key oil producing nations like Saudi Arabia, Russia and Iran, significantly impacting their ability to influence the larger markets.

-Change in the growth trajectory of countries or increased use of oil at low levels can change the demand of oil. There are a wide range of predictions about oil consumption growing around 1-2 million barrels per day year-on-year and the extent of China slowdown and good US data will play a big role in this.

-Pace at which electric vehicles may replace traditional means of transport is critical. Reports suggest that this could start gaining meaningful scale in the US/EU by 2020 and impact all current estimates of oil consumption.

-How soon can capital expenditure cuts start making an impact on production across the globe? Last year, big oil firms reduced their planned capital expenditure anywhere between 20-50% as they struggled to cope with lower prices. This should impact investment in maintaining output from existing fields and will also impact developed on new fields impacting production growth.

What this means for India is that in the next 1-3 years we will continue to enjoy the positive impact of low oil prices. The government will be able to maintain low subsidies on fuel and fertilisers and increases taxes on energy products and manage both the forex outflow and the fiscal deficit.

Industries like airlines, railways, refineries, petrochemical, rubber, paint etc. will continue to reap advantages of low oil prices and shore up their profits and pass some benefits to consumers. Indian state run refineries will be able to use a lot of money from this to fund important initiatives to upgrade to Bharat Stage VI standards which are critical to tackle the increasing pollution challenge.

This should also be a period when India can fill its strategic oil reserves at low costs or get into unique agreements like the one with UAE to be able to fill a large part of the reserves for free. Even though the prices are down now and are likely to remain range bound in the near future, it is not expected to shoot up again before electric vehicles and renewables pull down the prices in the longer run. Therefore, this is also a good time for India to buy oil assets across the globe to be able to manage the next upswing in oil.

The author is a Service Delivery Lead for Sapient Global Markets. He has worked with global oil super majors, large gas and power players and leading mutual funds and hedge funds helping drive business transformation and implementation of solutions in Supply, Trading, Risk Management and Physical Portfolio Optimization areas.

(Views express here are personal)