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Seeing the big picture of lower oil prices

Editor: Li Kun 丨CCTV.com

01-28-2016 16:45 BJT

By Tom McGregor, CNTV Commentator

About 18 months ago, crude oil prices in the futures markets were trading at around $US110-per/barrel. At its heyday, oil & gas corporations were reaping in cash bonanzas.


Along with the onset of new drilling technologies, such as hydraulic fracturing (fracking), oil & gas supplies were rising too. Oil-rich nations - Brazil, Russia and most Middle East countries - were basking in a windfall of soaring tax revenues and prosperity.

They were happy times indeed for them, but the economy is similar to life, with its ups and downs. Yet, economic cycles, empowered by market forces, can ensure overall balance.

If energy prices are too high that hurts the retail sector, since shoppers pay more for energy costs and have less available cash for other purchases. So, what comes up does go down in our "supply meets demand" world.

Impact of crashing oil markets

Oil is no longer near the $US110+ price range, plunging to about 75 percent lower. As of last Thursday, West Texas Intermediate Crude (WTI) futures was trading at $US28.23-barrel on the New York Mercantile Exchange.

That's a dramatic drop, since oil & gas remain the most reliable energy resources for consumers worldwide. But, demand is still falling due to sluggish or downward GDP (gross domestic product) annual growth rates for many countries.

A massive oil supply glut is developing and sparking concerns that prices would continue its free fall.

Accordingly, oil companies are taking measures to reduce operational costs. Seeking Alpha news website reports that oil & gas firms, starting last year, have either canceled or delayed major exploration projects, valued at over $US380bn.

Oversupply concerns could deepen

Oil demand is likely to continue to fall further, while oil exporters have not dropped production levels. Oil prices could stay low for a few more years, according to experts speaking to CCTV.com's Panview.

OPEC (Organization of the Petroleum Exporting Countries) members have voted against lowering monthly oil export quotas to spur higher prices. Saudi Arabia, world's largest exporter of crude oil, insists that OPEC would not change direction in the near future.

After sanctions were lifted against Tehran on Jan. 16, Iran's deputy oil minister, Roknoddin Javadi announced the nation's production would add another 500,000-barrels/day, while newly-developed oil fields are expected to increase it to 100-200,000-barrels/day soon.

Stocking up on the cheap

Oil stockpiles worldwide have reached alarming levels, but that's a golden opportunity for China, the world's largest net oil & gas importer. Beijing is taking steps to store up its strategic reserves.

"They've (China) been building more strategic storage," Jeff Brown of Singapore-based energy consultant FGE, told CNN. "The goal is to build out to about 500 million barrels, compared to the US capacity of 700 to 800 million barrels."

As of June 2015, China had already constructed 150 million barrels of extra storage, while China's crude oil consumption is holding steady at around 10 million barrels per day.

Chinese shippers are also playing a pivotal role to boost crude imports, while China's state-owned oil giants are leasing more super cargo tankers, which hold 3 million tons of oil per delivery.

Where's oil headed?

Prospects for oil & gas firms do look bleak and conditions could get worse before prices rebound higher. In other words, don't be surprised to see crude futures trade at or below $US20 in the days ahead.

However in a cyclical economy, oil prices can just as likely surge higher but a strong bounce may not occur until much later on. Nevertheless, there's no need to panic. Car drivers can relish in paying for lower gasoline prices for the time being.


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( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )



Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

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