Team Energy DaisCrude oil has maintained its reputation for surprising the market. In the recent times, every Big Oil company has witnessed a spectacle of challenges when it comes to the harmonic oil prices. Elevating prices and the declining inventories should be a reason for economies to rejoice. Wonder what economic pundits fear today? Glut moving downstream.
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Oil Crash: The unprecedented disaster
The growing population of the world, especially of the two emerging economies like China and India created a huge demand for Oil consumption at the beginning of the millennium. A simple demand and supply rule explains that production must respond to the gap created by this demand, resulting in the price ramification. What led to the Oil Crash was the fact that the demand was supplied by the U.S. which began escalating the production in this period. A conundrum as to stabilize the production or to halt the prices was faced by the U.S., Middle East and Russian countries who already sustained themselves by domestic production. Hence, the surplus, which couldn’t be consumed by the faltering emerging economies due to the great recession in 2007 which further, invited the free fall of price in the summer of 2014.
Its initial effect on upstream and downstream
A headwind to the upstream operation, the Oil Crash might support the downstream activities. A simple deductive reason is the fact that the upstream operations are rather costly. Exploration, extraction, and production occupy the major investment and hence it becomes a soft target for the effect of the crash. Because the financial standpoint is that high prices of oil encourage more exploration and investigation of fields which can be a promising site for oil extraction.
The recent negative impacts on U.S. downstream industry
The hard-hitting fact about oil prices is its relation with the producing agency which is fairly dominated by the U.S. companies. Crude inventory has seen a meaningful decline from 535 million barrels to 528.7 million barrels within a month in the beginning of this year. In such a short span of time, this decline is significant. So, it is inevitable to avoid its impact on U.S. downstream industry. Since companies are not getting new contracts, reducing production cost is the option they have. This move is not of much help as other countries can pick up in the downstream sector for its ease of investment which can be the possible cause of the crisis to hit the U.S. hard.
For a basic understanding of upstream operations, click here
Why downstream won’t be affected globally?
The production cost in the E&P sector, which is an upstream activity, is a fixed one. The flexible portion is the refinement of crude oil which is categorized as a downstream activity. Hence, downstream activity is not preceded by any company. It has its fair share; neither a company enjoys a monopoly nor does a group of companies affect the industry’s fate. This is the single most advantage that this stream of operations enjoys and it will not witness a scarcity of opportunities and investment given the global oil consumption doesn’t change drastically.
Emerging Oil importing economies might welcome this phenomenon of the glut going downstream as it will strengthen their fiscal policies. But it can be speculated that the prices can be as surprising as they have been in the past.
As there seems to be an absence of the stable oil prices in the market, which will continue to happen until the inventory tightens up a bit, it would be interesting to witness if glut will continue to move downstream in future.
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