The failure to reach an agreement in the meeting among the top oil producing nations in the world at Doha, the capital of Qatar, on 17 Apr’16 had sent out a clear signal—that crude oil prices are not going to rise and will stay at lows. And, it is apparently good news for the Indian steel industry as it subtly indicates that Pet coke prices, the economic and efficient fuel that is gaining wide acceptance among steel makers, will also remain low.
The meeting was chaired by officials of 13 Organization of Petroleum Exporting Countries (OPEC) and 5 non-OPEC nations along with Russia and Mexico to decide upon freezing oil output to Jan’16 levels, aimed at stimulating rise in oil prices; believed to mitigate the negative impacts of the oil supply glut. But, the meeting did not fructify as Iran refrained from participating. Iran did not approve of capping its oil production since it is attempting to regain its global market share after sanctions against it were lifted in Jan’16.
The meeting was crucial for some OPEC members, like Venezuela, Nigeria and Libya, as these countries were hit the worst by falling crude oil prices due to dependence of the economies mostly on oil (for revenues). Hence, these countries were in favor of curtailing crude oil output to help revitalize their economies. Even the falling crude oil prices took a toll on the economy of Saudi Arabia, the largest oil exporter in the world, which saw its GDP shrink by around 15%.
But, why have crude oil prices declined since mid- 2014? To answer simply, the crude oil prices declined due to over-supply.
Surging production in the American region was the initiator of the global supply glut. In an effort to increase its own production to tackle with the impact of the then high crude oil prices, American oil companies had resorted to extraction of oil from Shale formations, abundantly available in the North Dakota and Texas region of the USA. The effort had led to a boom in oil production in USA, and eventually demand was surpassed. Consequently, the import of 9-10 million barrels per day into USA came to a halt. At the same time, Canada also began extracting oil from its Alberta region, the third largest crude oil reserve in the world. And, during the same time, Europe and China were slowing down, so demand for oil also declined in these economies.
But, despite surging production in the USA, the OPEC and non-OPEC members refrained from cutting down their oil-production in a bid to not lose their market share. Although, in a surprising move, Saudi Arabia had instead increased its oil production aimed at not only maintaining its market share but also to counter the rising American oil production.
On 1 July’14, prices of WTI Crude Oil was at USD 105.29/barrel; Brent Crude Oil was at USD 112.29/barrel; and OPEC Crude Oil was at USD 108.68/barrel. The prices have fallen more than 60% upto Mar’16. On 31 Mar’16, prices of WTI Crude Oil fell to USD 38.3/barrel; Brent Crude Oil slid to USD 39.6/barrel and OPEC Crude Oil plunged to USD 34.33/barrel.
Nevertheless, the faint hope of some sections of industry players, who nurtured the latent hope of seeing better times, if the meeting succeeded in its objective, was shattered.
On the brighter side, the falling crude oil prices are in fact beneficial for the Indian economy as it has lowered the import bill, saving valuable foreign exchange. India is the fourth largest oil consumer in the world, and imports 80% of its demand.
Prices of crude oil derivatives also went south as a result. Pet coke, a key derivative of crude oil, has become cheaper than ever. As Pet coke is used as a substitute for thermal coal, low prices of the coal-substitute will boost margins of end-users, including the steel industry. Prices of fuel grade Pet coke have fallen to around INR 4,150/mt, as of Apr’16 due to the sinking oil prices.
Source: Steel 360 Magazine May’16 Issue