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IMC-ERTF Panel Discussion on ‘Crude Oil Market Outlook and Implications for India’ January 27, 2016 Global market may begin to Rebalance in Q4 2016 G. C handrashekhar, Director, ERTF and Economic Advisor, IMC
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Global crude market, so far... Large price drop since late 2014 Yet, 2016 supply growth up 2.6 mbpd High stock builds continued at 1.8 mbpd Current over-supply burden will need time to work off
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Effect of low prices Current prices encroach on operating cost levels of non-OPEC producers; force high-cost producers to operate on negative variable cost basis; In short-term, it triggers higher decline rates for conventional producers as also decline in US shale production.
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Break-even price for oil ($/barrel) <35 = Saudi Arabia, Iraq, Iran, Kuwait ~40 = Norway, Qatar ~50 = Russia, Venezuela >60 = UK, Egypt, USA, Canada, Nigeria
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Supply outlook in 2016, 2017 Events that contributed to supply growth not repeatable in 2016 Near-imminent supply reduction from non-OPEC sources due low prices; output may decline ~1mbpd in 2016 and further ~0.8 mbpd 2017
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Supply outlook in 2016, 2017 OPEC: expect growth of ~0.8 mbpd in 2016 and ~0.3 mbpd in 2017 So, global production growth to slow to only 100k bpd YoY in 2016, 2017 Supply growth to begin to contract in 2016; stock builds to stabilise in H2
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Supply outlook in 2016, 2017 Expect market to begin to start process of rebalancing by end-Q3 - early Q4, 2016. Meanwhile, inventory will build further; so, rebalancing will be slow, delayed, painful.
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Demand and price expectation Despite economic growth concerns, global crude demand growth expected to stay normal at 1.4 mbpd for 2016, 2017 In sum, expect prices to recover from sub-30 levels to test $ 40/bl by Q4 At some inflection point, funds will move in on long side to test upside price potential
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Longer-term outlook – prolonged period of low prices Era of relatively low prices could last many year due (A) sluggish global growth (slowing EM growth, aging matured economies); (B) Tech advances in fuel efficiency in transportation sector; (C) Tech improvement in oil extraction reducing costs; more output from fewer rigs.
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Risk factors Short-term: Downside if China hard landing; demand growth reduction through renewables; market share war among key producers. Upside if OPEC cartelized output cut; Geopolitical instabilities; Unexpected depreciation of USD;
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Implications for India Effect on import, consumption, forex outflow and CAD Effect of currency (INR) weakness on landed cost Strategic reserves
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Thank You G. Chandrashekhar Director, ERTF & Economic Advisor, IMC Phone: 022-22046633 Mobile: 919821147594 email: g.chandrashekhar@imcnet.org gchandrashekhar@gmail.com
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