Oil price uncertainty (2): Attired as a bear.

Cheap oil, cheap gas.

Source: Wikipedia.org

The market is glutted with oil. Supply has overshot demand. Global demand is not expected to rise quickly. The textbook solution is to make supply rarer. It’s not an easy solution when reality strikes. It’s about market share. America has had a revolution in oil production since fracking was discovered. It has increased American production of shale. It is reported that US oil industry is presently encountering an oil storage problem. She’s not in a haste to make production cuts; and so are the Saudis.

Saudi Arabia, one of the major producers of oil and a key founding member of OPEC, is going to hang on to its share of the market, whether it encounters losses or not.

The Saudis, I opine, do not rely on the U.S Energy Information Administration (EIA) pronouncement that demand might soon increase due to identified “tentative signs” of a recovery since the beginning of 2015.

Why? Iran and American have advanced on nuclear talks. If sanctions are removed, Iranian oil might increase global output. Libya has reported that the fall in oil prices has affected her GDP in significant ways. She can do nothing but increase output even if. This worries the Saudis. No one thinks they’d give grounds to the Venezuelans and Nigerians who face enormous losses in growth and income earnings if oil prices do not rise again soonest. Last week, Nigeria was downgraded by Standard and Poor’s; oil price declines and election uncertainties were reasons given.

The fortune of multinational companies in the oil and gas industries as well as renewable energy is at stake. It cuts across every facet of energy. Renewable energy has a substitution relationship with natural gas. When gas prices fell, the demand for renewable energy came after. What will happen to the stocks of renewables? They’ll go bearish.

Investments made in shale and renewable energy by lots of investors before the dip of June 2014 is at stake. Texas, an oil producing state in the US, will lose 140,000 jobs in 2015 and its economy will slow to 1-2% from 3.4% in 2014. Two Houston-based companies, BPZ and Dune Energy, have already filed for bankruptcy. Most energy executives are concentrated on one objective: spending cuts to conserve cash and survive the downturn.

If the situation at Yemen becomes more precarious, Saudi Arabian oil will be affected. That, an uncertainty that carries a heavy discount, might well bring the prices of oil down. India has been reported to be taking advantage of low oil prices to insulate itself from supply distortions. Saudi Arabia is the major oil exporter to India. It might well be insulating itself to a foreseen supply distortion that would be caused by the action happening in Yemen.

Previous article in the series: Oil price uncertainty (1): Monetary and fiscal policies might arrive too late to be effective.