Sunday, March 6, 2016

Global politics and economics Oil price prognosis

Predicting the oil prices is a hundred million dollar question; in literal sense, it's a game of billions of dollars. This is one of the most difficult tasks, given that there're too many variables and moving parts on the economic, and more so, on the political fronts. Market punters are not willing to take a view for longer tenors and quote forward rates for larger volumes beyond 2/3 months. The recent phenomenon is surely more political than otherwise.

The similar situation was witnessed almost 30 years back, in 1985-86 when there was oversupply situation whilst demand, and hence prices, remained subdued. The meaningful difference this time round, however, is the enhanced world storage capacity availability - 85 million tons. Therefore, as a side note, the storage in the oil sector remains the single biggest business opportunity for the investors, particularly in Pakistan, as that would determine the energy security levels and dependence on the international oil supplies and the price volatility in future.

Whatever the case maybe, the fact of the matter is that the oil price movement is largely dependent on the global politics. This is also a fact that the US is driving the world politics, and their future actions will drive where the prices will settle. The dependence of USA on the Middle Eastern, more specifically Saudi, oil is minimal - merely 16%. This was all achieved in a very strategic way in the last decade by the administration of USA - imposing ban on exports, focusing on indigenous E&P activities (shale, case in point) and enhancing the storage capacities. Resultantly, in 2010-11, the total indigenous production over took the imports which stands at over 60% now.

This development helped USA in driving the
 
global foreign policy more effectively and efficiently; more importantly without violence. In this back-drop, will try and assess, in the write-up, where the oil prices are likely to settle in 2016 and beyond. The fact is that the elections in USA will also play a major role in driving the world politics and; therefore, the international oil prices. This is very obvious that the two main competing parties for the White House have very divergent strategies to handle the world politics - Republicans more force-driven; whilst Democrats are more economic supremacy- driven. The results of surveys towards elections at the end of the year will be key in this context. USA has enough cash reserves and economic & financial strength to withstand any losses in the interim, until the oil prices settles down to their advantage, to ensure that they keep a good balance between the level of oil prices and the global politics.

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