Oil Glut and the Emerging Scenario

Rothindra Nath Goswami

The present global oil glut re-illustrated that no market can defy the simple, yet very
basics of economics i.e. ‘supply and demand’, imbalance of which could create
devastating consequences. Whatever the cause of this situation, whether the all-time
high production of the USA propelled by Shale oil boom, or slowdown of world
economy in general and China’s growth in particular, or selling of oil by ISIS, it is
certain that this glut will have a far reaching consequence to the oil industry in the
future. This probably could be a turning point in the history of oil industry as the
present scenario would determine the future strategy of oil exploration and
production in the backdrop of oil glut and in the process ‘what if’ scenarios to be
inbuilt in the whole gamut.

The market which hovered above $100 per barrel for quite some time infused a
momentum towards exploration of unconventional and difficult hydrocarbon
reserves, which turned profitable at that prevailing market economics. This
catapulted a milieu where oil companies took this opportunity to a new level,
especially shale oil or tight oil exploitation, and thus the industry entered a new era
where difficult oil pools becomingly possible. The paradigm shift in vision and
technology, reaffirmed the industry that impossible could be made possible. Looking
at the development, Spencer Dale, chief economist of BP group proposed last year
that future oil economics would be influenced by a new set of principles including the
new belief that oil is not likely to be exhausted and the supply characteristics of shale
oil are different.

The increasing trend of oil production continued to defy the Hubbert peak oil theory
and it reached such a level that the peak oil concept is pushed to the oblivion. On the
contrary, a new scenario evolved indicating that the demand of oil is nearing peak.
The February (2016) report of the International Energy Agency (IEA) has confirmed

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that crude oil demand is slowing down rather dramatically during this year. But even
then, oil exporting economies can’t cut down production unilaterally which would
amount to shrink of their respective market share and vis-à-vis influence in the oil
market. The downward trend of oil market has magnified the pre-existing unrest in
many countries including Middle East and started creating undulations in their
economies.

Annals of oil industry taught us that the volatility of oil market is not some aberration,
but it is more the norm. Only difference is that it is very difficult to accept the volatility
at the present situation. Initially, energy experts thought that the price drop would be
small and short-lived. But, according to the IEA, the global oil glut is larger than
previously thought and the risk of prices falling further has increased.

During one year, the big drop in US rig count points to capitulation by U.S. shale
drillers towards this difficult market condition, which would translate into decrease in
oil production. Once the supply and demand head back towards balance, some
respite for hard pressed oil producers will definitely come. But that’s not imminent.
The weak oil price is influenced by a number of conditions. Neither OPEC nor Russia
is agreeing to cut back production to erase the glut, and on the other hand Iran and
Iraq are on an increasing production trend, while many countries already made
preparations for enhancement of oil production.

The surplus production scenario led to the huge requirement of surface storage
facilities. The increasing stock building of crude oil and result of building up of huge
strategic reserves would continue to impact the oil price. In the prevailing scenario,
the IEA’s forecast is that demand for oil is expected to weaken further.

According to the 2016 edition of the BP Energy Outlook, published on 10th February,
2016, the world is transiting towards low carbon future and energy basket would be
tilted towards lower-carbon fuels and as a result growth of oil demand would be
slower.

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Various predictions claimed that the market would take at least more than a year to
recover from $30-$40 slump as it is awash in oil. But even then, the market is not
likely to rebound to June 2014 situation. World’s largest energy trader Vitol’s recent
prediction of another decade of low oil prices in the band type of $40 to $60 has
come as a shocker for the oil exporting countries. The problem, according to Vitol, is
that there is too much supply while demand is slowing down as the world becomes
more efficient in the consumption of oil.

Referring the present oil glut in a completely different and bigger perspective,
Francisco Blanch at Bank of America Merrill Lynch stated that the oil crash is setting
the stage for one of the largest transfers of wealth in human history. It is certain that
the positive impact of decreasing oil price would help the emerging economics. But
at the same time, a lot of oil companies and service providers will be crippled by
bankruptcy and lakhs of workers will go jobless. Most of the oil export dependent
economies have already started facing crisis.

Growing concerns about climate change and environment has been trying to eat oil’s
share, but was not successful in the past due to the growth of emerging economies.
Now, it seems efforts on various alternatives including highly efficient transportation
and growth of renewable energy would definitely put a brake in the growth of oil
market.

Amidst this glut, producers are trying to figure out how to raise efficiency levels and
adapt to this trough. This will definitely help the hydrocarbon industry in establishing
new benchmark for exploration and production processes, and insular future projects
from market volatility and challenges. The evolving new economics of oil suggest
that the oil market would never be the same again as it understands that there is no
fear of exhausting of oil reserves, growth of world economy would be slower and
shale oil boom like situation can always act as a cap on any upward market rally.

(The writer is a Geologist with more than two decades of oil industry experience)

Email: rothindra@hotmail.com, Mob:9410396560

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