Drivers of oil prices
Like any other commodity, crude oil is also subject to demand-supply dynamics. Simply put, when production goes up or demand goes down, the global prices fall. But that is not the end of the story. The market players fully appreciate how the current global economy depends upon this fossil fuel and this gives rise to speculation. Oil prices are set at the major exchanges, ICE Futures in London (Brent) and Nymex in New York (WTI), which include a large share of speculative push. It is estimated that roughly 50% of oil prices we see today is pure speculation!
Read: Oil Price Trend Update
The major chunk of the derivatives market is driven by a handful of global banking giants and therefore, system runs heavily on market sentiments. The prices so determined form the basis of crude oil pricing in international markets. Many oil producers use the Brent.
The current slump is largely attributed to the likelihood of a plunge in future demand and existing oversupply in the market. Some of the big consumers, such as China, are grappling with an impending slowdown. Bad news is trickling from the other corners as well. On the flip side, the present industry scenario is marked with intense competition between oil producing companies. Everyone is eyeing a bigger share in the pie even if it means stretching beyond the resources for the time being. It’s a no-brainer that a cut in production will have a salutary effect on the prices, but the individual producers and OPEC are playing the waiting game to see who yields first. Unless there is a consensus, it is a high probability that those who reduce their production will lose market share to those who do not follow the suit. According to OPEC President Emmanuel Ibe Kachikwu, “We just felt comfortable to wait and watch.” The group believes that even a 5% cut is not going to have much impact and is blaming shale oil for the fiasco. To add to an already complex situation, with the lifting of economic sanctions, Iran will soon amp up its production. However, the OPEC decisions cannot be considered representative of all the members because not everyone has an equal say and the organization is dominated by top couple of players.
It is difficult to predict as to how long this stalemate will remain, but most analysts are of the view that if this trend continues for long it might have a ripple effect on the world economy.
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