Tuesday, 16 December 2014

Greed and fear driving crude oil prices

It is becoming more evident that both the U.S. and OPEC members are falling prey to greed and fear.  All the producers want to pump more oil to retain their respective market share. While it seems almost impossible to boost demand, production at faster rate is creating glut. In the past hedge funds were prompt in enhancing their stake in oil but this time they seem least interested.

Does this mean they are also victim of fear and don’t see prices rebounding in the near future. It may not be wrong to say that many of the reports being published by the western media are opinion not the news. These reports suggest that the glut is because OPEC members are not willing to curtail production. However, there has been no suggestion that the U.S. should curtail production.
Having reach a point that OPEC may not be keen in reducing output and also read news that even geopolitics is not working, it was feared that oil countries suffering from turmoil would be the first to stop production. The fears came true as dispatches from Libya and Nigeria are almost halted.
Oil prices have already declined by almost 45 percent this year to a five-year low after OPEC producers including Saudi Arabia, Kuwait and Iraq reduced prices and the International Energy Agency cut its estimate for global demand for the fourth time in five months.
People like Michael Lynch, President of Strategic Energy and Economic Research in Winchester, Massachusetts believe that prices are close to the bottom. Many readers consider this ‘disinformation’ because other still believe price could slip below US$40/barrel. This is a level which is certainly not liked by Shale oil producers, who have also started propagating that higher production is helping in bringing down cost of production.
 “This shows that there’s a lot of skepticism about the selloff and a feeling that prices should soon rebound,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, informed and continued, “We’re seeing bargain hunting by investors of all stripes.”
OPEC will stand by its decision not to cut output even if oil drops to as low as US$40 a barrel and will wait at least three months before considering an emergency meeting, United Arab Emirates Energy Minister Suhail Al-Mazrouei said at a conference in Dubai. The 12-member group maintained its collective target of 30 million barrels a day at a Nov. 27 meeting in Vienna.
The slump in benchmark U.S. crude futures, is driving producers to move drill rigs to lower-cost fields. While there’s evidence of some rebalancing starting to occur in the market, many believe it isn’t sufficient.
There is growing impression that costs are falling nearly as fast as the price, which means oil producers can spend less to get the same or potentially even more in terms of production. While reductions in capex are coming faster than expected, it is unlikely to translate into less supply, despite that number of drill-rig has dropped as much as 20 percent.


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