FreeFall Of Oil Prices

    Most Spoken/Written words in Pink Newspapers for the last one or two months are Freefall of OIL PRICES. Oil prices have been fallen more than 25% in tha last four months are so, lowest ever since June 2012. It was $150 per barrel in 2008 and now it is $85 per barrel.It could affect Global as well as Indian Economy in many ways. Here I would like to mention the facorts which could affect the oil prices.

  The first and foremost thing is OPEC, it is a consortium of 13 countries, is the single largets entity impacting the world's oil supplies. OPEC countries contribution to the world production is 40% and the remaining is from non-OPEC countries. Even though they have less than 50% of production share, they are able to control the oil prices backed by reserves. OPEC contries have lot of reserves compare non-OPEC coutries. Supply and Demand is the next factor which would affect the oil prices, it follows law of demand-cetiras paribus. Next and most contemparory factor is political unrest, Mostly of the oil producing countries' revenue comes from exporting oil only and the oil producing companies are mostly run by respective goverments only. So whenever there is a political unrest, production will get affected as we are seeing in the case of Iraq and Iran. Many countries will have their own tax margin on exports which will also affect the oil prices, quotas in exports also depends on the agreements among the countries. Financial markets also will affect the price changes. In financial markets, Traders and Speculators are the main influencers of oil prices. Traders will not affect the oil prices as much as done by Speculators. Speculators will enter into FUTURES contracts by speculating the prices, if there is an homogenious expectation among speculators, then there will be a bad affect on oil prices. It's like moving all the people in the boat to one side, which would tips over the boat. Natural calamities also will affect the price changes, when there are advers condition for production, then supply will be less which will lead to rise in the oil prices. Seasons like winter will have more demand compare to summer. USD value also will affect the oil prices. Oil prices will be denominated in USD across the globe, so whenever there is a change in the dollar value it will affect the oil prices also. Appreciation will decrease the demand and vice-versa.

   Now we will see what all are the factors which are affected for freefall in oil prices. First one is the U.S shale boom, which is one kind of extraction of oil. The U.S domestic production of oil has been increased due to shale boom. The U.S is the largest importer of oil in the world, now their demand has come down to nearly half due to domestic production. The below chart will provide you the history of both oil production and oil Imports of the U.S.

Their production has reached peak in 2014 in the last 25 years and imports have touched the lowest in the last 20 years. The U.S will be going to produce more than Suadi and Russia by 2016. Production in the most OPEC countries will reach at full as their political and internal issues looks to settle down like Iran nuclear issue, Libya's country revolution and so.

    OPEC's limited ability to boost prices by cutting production. Most of the OPEC countries are having huge fiscal deficit and under currency stress. These countries revenue is mostly from exports, so these countries accepting the market determined rate. Demand for the oil across the globe has decreased, especially China and Europe. China's economy has slowdown and manufacturing sector has pilled-up inventory which is not letting them for the further production. Manufacturing sector in China is the major consumer of oil imports.

The above chart will give us the clear picture about demand pattern across OPEC and non-OPEC nations.

     USD will also affect the oil prices, since USD has been strong the oil prices have been affected.

  To conclude this, We will see the affect on Indian Economy. I would say Mr. Modi took over the supreme chair, everything is going in his favour. Indian economy's main problems are fiscal and current account defisits. Oil imports are contributing around 45% of total imports and 85% of total oil consumption in the country. Now we can say how much it will affect the current account. India Govt's one third subsidy is going to oil imports only, when there is a freefall in the prices it would directly affect the economy in three folds. Govt will left will money which would directly invest in public infrastructure. The govt target of 4.1% of fiscal defisit is now achievable. Inflation also will be decreased as oil prices have 8.9% of share in the WPI. By taking all these factors into consideration, Indian economy will have more chances to revive soon.

As a final point, Since the supply has been increased in the world and demand has been decreased as a whole, Oil prices have been decreasing. To see it from the long-term perspective it may not be the case, Geopolitical risks like war between Russian and Ukraine, Middleeast unrest, Inflation risks and The U.S QE3 will halt the freefall.

charts taken from Bloomberg website.