Friday 16 October 2015

How the Oil sector is shaping up

The biggest risk to global inflation at present is a further decline in the price of oil which has seen one of the steepest drops of all time. Charlie Bilello highlights exactly this point in an article he wrote for Seeking Alpha.

The decline in oil prices unfolds as new producers namely shale gas industry take on the old guard yet dominate force in the oil sector, OPEC who supplies approximately 40% of the world's oil supply. It's quite tough to predict who will be victorious in this price war as the one side sits with hordes of debt made to fund the initial start up which is capital intensive and facing a cash generative problem with the oil price being so low so as not to reach a breakeven point. The other risking the wellbeing of member nation economies to fight off a vicious offensive from new fuel technology in the hope to starve off this competition to remain the world's top supplier.    

For now we've seen a series of bounces and a stabilisation in the price that does help settle the nerves somewhat yet as the weeks past many try to speculate whether current price action is a break in trend to catch it's breathe and continue its descent.
One of the main antagonist is the leader of OPEC, Saudi Arabia who is the largest supplier of oil. The nation is the main decider in whether member nations should increase or decrease production with the current view to increase creating an oil glut. This hasn't been with positive feedback as some member nations Nigeria and Venezuela battle dire economic situation pleading for an emergency meeting to cut back production but to no avail.

However there seems to be a strategic move by the Saudis to place themselves first in the queue when demand picks up by storing more oil in leased oil tanks in the region of Okinawa in Japan. The oil giant nation has been using the island for the last five years in an effort to deliver oil quickly to the Asian region.

Actions such as these may upset the balance of things within the collusive oil body as many members may see it as the Saudis feathering their own nests while other members suffer the economic consequences started by the oil leader. It leaves potential open for "cheating", an activity where members do not follow the production quotas set out by the leader leading to wide price changes.

All the while this is happening the "Sleeping giant" China is gradually building up its own oil dependency needs by strategically tying itself up to oil players over the long term and investing in oil transportation capabilities that will ensure the quick supply of the energy that drives the economy.

I think OPEC's fight with US shale producers is the least of their worries as China's population is 5 times more than the US. Both nations currently consume roughly the same percentage with China have potential to grow further from here onwards. However if OPEC isn't mindful, China may begin to align it's business interests with nations that do not fall within the collusive body, namely Russia who has is known to oil rich or even Africa where oil reserves are being found at a blinding pace.
 
Will these threats outweigh the current battle OPEC engages itself in with the West?
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