Oil oversupply, US sale of strategic oil reserves, global shift to renewables and electric vehicles, downturn in oil and commodity exporting economies, China slowdown are all factors that can drive down oil prices back to USD 25/bbl seen in 2016.
Brent Crude Oil price has declined sharply after increased supply from several key producers overshadowed high compliance by OPEC and non-OPEC oil producers with a deal to cut global output. Brent Crude oil settled at USD 46 per barrel on 20th June 2017, its lowest closing price since the month of November 2016.
The Organization of the Petroleum Exporting Countries and other producers had agreed to cut output by 1.8 million barrels per day (bpd) for six months from January 2017 but extended the same till the month of March 2018 in the meeting held in the month of May 2017. The output was cut to control the supply in the international market that would put an upward pressure on prices.
But things have not turned out as expected for OPEC and supplies rose in the month of May 2017 as output recovered in Libya and Nigeria, both exempt from the production reduction agreement. Libya’s oil production rose more than 50,000 bpd to 885,000 bpd and exports of Nigeria’s Bonny Light crude are set to reach 226,000 bpd in August, up from 164,000 bpd in July. Opec crude oil output rose by almost 300,000 bpd in May 2017 to around 32 m bpd — the highest level this year.
US shale oil production will make up more than half of the 1.5m bpd in non-Opec supply growth forecast for next year, and is expected to rise by 780,000 bpd after an increase of 430,000 bpd in 2017.
The actions of OPEC have not been able to completely control the prices of different varieties of crude oil in the international market as relatively lower price of crude oil (more than USD 40 per barrel but below USD 50 per barrel) is making US shale oil production feasible. The technology of extraction of crude oil has become efficient and effective even below USD 50 per barrel for Shale oil production.
If this situation continues in the US then crude oil prices in the international market are expected to trend lower in the near future.
US Sale of Strategic Oil Reserves
The Trump Administration has proposed to sell off half of the oil which is stored as a part of the emergency reserve called as the Strategic Petroleum Reserve (SPR) in a bid to generate revenue for the US Government and help contain fiscal deficit. This move comes on the back of the rising shale oil production in the US economy and highlights the fact that the need for import of crude oil has reduced drastically giving way to completely being self reliant on future needs for oil.
The White House budget, delivered to Congress on 23rd May 2017, proposes to start selling SPR oil in fiscal 2018, which begins on 1st October. Under the proposal, the sales would generate USD 500 million in the first year and gradually rise over the following years.
The SPR is an emergency fuel storage of petroleum maintained underground in Louisiana and Texas by the United States Department of Energy. It is the largest emergency supply in the world, with the capacity to hold up to 737 million barrels.
Global shift to Renewables and Electric vehicles
Pollution is on the rise as petrol and diesel vehicles, which include two wheelers, four wheelers and three wheelers continue to grow in numbers in a country like India and China. Vehicular emissions may get even worse if favourable environmental policies are not designed and implemented in the near future. The alternative to petrol and diesel vehicles are natural gas fuelled and electric vehicles as both have lower emissions in comparison. Electric vehicles have lower or almost zero emissions in comparison to natural gas fuelled vehicles.
Global sales of Plug-in passenger cars stood at 75500 units for the month of September 2016, which is 55% higher than for September 2015. From January 2016 to September 2016 nearly 518000 units were sold, 53 % more than during the first 3 quarters of 2015. China is the worlds largest plug-in market, with 225000 units Plug-in passenger cars sold till September 2016, a staggering 117% higher than January-September 2015 period. The bestselling brand in the month of September 2016 was Tesla with nearly 13000 units delivered. From January 2016 to September 2016 the largest seller was BYD at 75320 units followed by Tesla at 56000 and VW at 42500.
The Chinese economy expanded 6.9 percent year-on-year in the March quarter of 2017, compared to a 6.8 percent growth in the fourth quarter 2016 and slightly above market consensus of a 6.8 percent growth. GDP Annual Growth Rate in China averaged 9.74 percent from 1989 until 2017, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990. The Annual GDP growth in the March 2017 quarter it seems has been lower than the average growth of 9.74% from 1989 until 2017 which goes to show the gross slowdown in the China’s economy.
The Chinese economy expanded 6.7% in 2016, lower than a 6.9% growth in 2015. It was the weakest full-year expansion since 1990 but within the government’s target range of 6.5 to 7 percent, as investment and consumption growth has softened.
China’s economy could be slowing down, denting the growing confidence that the world is back on a strong upward trajectory and highlighting risks to the increasingly upbeat picture in developed markets. Industrial production grew by 6.5% year on year in April 2017, a level which is far higher than growth in western economies, but represents a sharp fall even from the 7.6% just a month earlier.
China’s implied oil demand growth eased to 2.5 percent in 2016, down from 3.1 percent in 2015 and 3.8 percent in 2014, led by a sharp drop in diesel consumption and as gasoline usage eased from double-digit growth.
Downturn in oil and commodity exporting economies
Countries like Venezuela and Nigeria are majorly dependent on oil for their revenues and any decline in the price of crude oil would directly impact their revenues. Other countries like Russia and Middle East Nations are not far behind in depending on oil for most of its revenues. Any impact on the revenues for these countries would mean rising budget deficits in the time to come.
Also due to the slowdown in growth for China’s economy, commodity driven export dependent countries would continue to witness drawback in demand for their products eventually hurting their revenues and impacting budget deficits as well.