Oil at $20/bbl

That may not be really too far off…

Goldman Sachs has been warning of $20 oil for quite some time and that prophesy seems to be appearing increasingly plausible now. A mix of supply glut, weak demand and changing oil economics, could lead to oil touching $20. Let us understand the key factors that could drive oil to new lows…

OPEC continues to supply…

 The last OPEC meeting in Vienna was supposed to vote on supply quotas. Instead it gave a free hand to OPEC members to produce as much oil as possible. With a supply glut likely to take the market by storm, prices are unlikely to bounce. Countries across the Middle East, Africa and Russia are all pumping oil at record capacity. The market has been oversupplied for over a year and that has created record stockpiles. This supply glut is unlikely to end any time soon.

What if the US exports oil…?

That could be the next big oil story. Since 1973 when the Arab Embargo was imposed, the US has upheld a ban on petroleum exports. But things may be changing. Having become the world’s largest oil producer churning nearly 14 million barrels a day, exports were only a short way off. Remember, US exports today are 12.5% of their GDP compared to 9% a few years ago. Imagine, what could happen if oil joins in. It could change the economics of global oil.

Running out of storage space…

Oil storage by itself is a complex topic. There are different levels and types of oil storage. There are sovereign governments that hold oil in Strategic Petroleum Reserves. Then there is private storage in tanks by oil extractors and refiners. There is a very important storage of oil, which is referred to as oil in transit. This includes oil being transported by tankers and flowing through pipelines. Last, but not the least, there is the case of oil being stored in offshore tankers by traders, investors and speculators who need to give delivery of physical oil. Today the world is running out of space to store as global stockpiles have crossed 3.2 billion barrels. An unwinding of stored oil could be the next big price dampener.

The dynamics of oil are changing…

Post the Paris Climate Summit, a big change is likely to happen. Fossil fuels need to be cut drastically in the next 30 years. That means countries like Saudi Arabia and Russia with large proven reserves need to expend them quickly. Even before the Paris terms kick in, solar energy is emerging as a viable alternative. Normally, a fall in oil prices detracts interest from solar. That has not happened; meaning solar is here to stay. The big worry for oil is supply glut, limited storage and an environmental expiry date. Goldman may be right. Oil may see $20/bbl quite soon!  ©

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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