OIL history and its impact on STOCK MARKET

OIL and its impact all details explained

First lets see, what is

CRUDE OIL & BRENT OIL

OPEC, a group of 13 of the most powerful oil exporting countries, use Brent as their pricing benchmark. They are considered an extremely powerful group, as oil prices dictate the budgets and policies of many countries

In the United States, West Texas Intermediate is the preferred measure and pricing model. It is also slightly "sweeter" and "lighter" than Brent. West Texas Intermediate (WTI) is slightly lower in price than Brent.

The major difference between the crude oils Brent Crude and West Texas Intermediate is that Brent Crude originates from oil fields in the North Sea between the Shetland Islands and Norway, while West Texas Intermediate is sourced from U.S. oil fields, primarily in Texas, Louisiana, and North Dakota.1 Both Brent Crude and West Texas Intermediate are light and sweet, making them ideal for refining into gasoline.

Brent Crude is produced near the sea, so transportation costs are significantly lower. In contrast, West Texas Intermediate is produced in landlocked areas, making transportation costs more onerous.

The Organization of the Petroleum Exporting Countries (OPEC) controls most of the oil production and distribution, often dictating costs for not only oil suppliers but countries as well.Most nations factor oil prices into their budgets, so OPEC has been considered a leading geopolitical force.

The impacts

The price of oil is a major factor in the overall health of the energy sector and is one of the most heavily traded commodities as it is influenced by almost every global, macro event.

Another factor that can lead to significant differences between Brent Crude and West Texas Intermediate is geopolitical trouble.During times of crisis, the spread blows out as political uncertainty leads to surges in Brent Crude prices. West Texas Intermediate is less affected because it is based in landlocked areas in the United States.

Crude oil prices change quickly in response to news cycles, policy changes, and fluctuations in the world's markets. Since 2014, oil prices have experienced a downward journey, falling from highs of around $105 per barrel.

Supply

For several decades, the Organization of Petroleum Exporting Countries (OPEC) has been the elephant on the world's trading floors, with its oil-producing member nations working together to determine prices by boosting or reducing crude oil production. While OPEC's grip on the market has loosened some in past years, its decisions continue to play a dominant role. OPEC's every move is watched closely by governments, oil companies, speculators, hedgers, investors, traders, policymakers, and consumers.

The supply crude oil is also determined by external factors, which might include weather patterns, exploration and production (E&P) costs, investments, and innovations. For example, thanks to advances in technology that allow companies to extract oil from rock—so-called shale oil—the United States became the world's largest producer of oil in 2018 and a major source of global oil supplies.

China, India, and Saudi Arabia had the largest growth in oil consumption among the countries in the non-OECD during this period 2000 to 2010

Reports on production figures, spare capacity, target pricing, and investments can be a crucial factor in the setting of crude oil prices. Some of the most keenly followed reports are OPEC's monthly oil report, International Energy Agency (IEA) oil market report, and weekly inventory data from both the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA).

Probably the single biggest influencer of oil prices is OPEC, made up of 15 countries (Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Republic of Congo, Saudi Arabia, United Arab Emirates, and Venezuela); collectively, OPEC controls 40% of the world's supply of oil

OPEC was founded in the 1960s to—put it crudely—fix oil and gas prices. By restricting production, OPEC could force prices to rise, and thereby theoretically enjoy greater profits than if its member countries had each sold on the world market at the going rate.

The history

Until the middle of the 20th century, the United States of America (U.S.A) was the largest producer of oil and controlled oil prices. In the years to follow, OPEC controlled the oil markets and prices for most of the latter part of the 20th century. However, with the discovery of shale oil in the U.S.A and advances in drilling techniques, America has re-emerged as a top producer of oil. 

In the early 1860s, according to the Business Insider, the price per barrel of oil reached a peak of US $120 in today's terms, partly due to rising demand resulting from the U.S. civil war. The price fell by more than 60% over the next five years and rose by 50% during the next five years. 

In 1901, the discovery of the Spindletop refinery in eastern Texas opened the floodgates of oil in the U.S. economy. It's estimated that 1,500 oil companies were chartered within a year of the discovery. Increased supply and the introduction of specialized pipelines helped further reduce the price of oil. The supply and demand for oil rose additionally with the discovery of oil in Persia (present-day Iran) in 1908 and Saudi Arabia during the 1930s. 

By the mid-twentieth century, the use of oil in weaponry and the subsequent European coal shortage further ratcheted demand for oil, and prices came crashing down to $40 in today's terms. American reliance on imported oil began during the Vietnam war and the economic boom period of the 1950s and 1960s. In turn, this provided Arab countries and OPEC, which had been formed in 1960, with increased leverage to influence oil prices. 

A number of world events have helped OPEC maintain control over oil prices. The fall of the Soviet Union in 1991 and the resulting economic tumult disrupted Russia's production for several years. The Asian financial crisis, which had several currency devaluations, had the opposite effect in that it reduced oil demand. In both instances, OPEC maintained a constant rate of oil production. As of 2019, OPEC controlled 74.9% of the world's total crude oil reserves and produced 42% of the world's total crude oil output.

when there is a glut of oil in the world, OPEC+ cuts back on its production quotas. When there is less oil, it increases oil prices to maintain stable levels of production. 

OPEC vs US

The discovery of shale oil in North America has helped the U.S.A achieve near-record volumes of oil production. According to the Energy Information Administration (EIA), America's oil production was 12 million barrels per day (bpd) in 2019, making them the world's largest oil-producing country. As of December 2019, U.S.A. was the world's top producer followed by Russia and Saudi Arabia. However, Saudi Arabia is still the global leader in exporting oil followed by Russia and Iraq. In fact, these three nations, all members of OPEC+, account for nearly 36% of the supply of oil for the rest of the world.

Shale is also gaining popularity beyond American shores. For example, China and Argentina have drilled more than 475 shale wells between them in the last few years. Other countries, such as Poland, Algeria, Australia, and Colombia, are also exploring shale formations.

As oil prices rise, U.S. oil companies pump out more oil to capture higher profits which would limit OPEC's ability to influence the price of oil. Historically, OPEC's production cuts had devastating effects on global economies which has been somewhat diminished recently. Also, the U.S. is one of the world's top consumers of oil, and as production at home increases, there will be less demand for OPEC oil in the U.S.

But, it is important to note that, although the United States is the top producing nation, the top exporters are predominantly members of OPEC+, which means that they are still the key player in the oil price determination process. There may come a day when OPEC loses its clout but that day is not yet here.

Why OIL price collapse ??

The coronavirus has undermined energy demand worldwide, but especially in China, which is now the number one importer of crude oil, guzzling roughly 10 million barrels a day.

Factories have been idled and thousands of flights canceled around the world as the coronavirus outbreak that began in Wuhan, China, has become a global pandemic.

The International Energy Agency said Monday that it expects demand will contract this year for the first time since the recession in 2009 that followed the global financial crisis.

US crude plunged nearly 7% and finished at an 18-year low of $20.09 a barrel Monday as the coronavirus pandemic continues to deal a devastating blow to energy demand.

At session lows, oil touched $19.27 a barrel -- the weakest intraday price since February 2002.

Brent crude, the world's benchmark, tumbled as much as 13% and fell to as low as $21.65 a barrel, its lowest point in 18 years. Brent settled at $22.76 a barrel, the lowest close since November 2002.

The renewed selling in the oil patch underscores the unprecedented collapse in demand caused by the social distancing restrictions imposed by governments around the world. Highways are empty. Entire airlines are shutting down. Macy's (M) just furloughed a majority of its 125,000 workers. Factories large and small have halted production.

Also Saudi Arabia and Russia are flooding the world with excess oil -- at exactly the time when the opposite approach is required. That price war is exacerbating the pain in the oil market.

Those factors have driven US oil prices down by a stunning 68% since the recent peak of $63.27 a barrel in early January.

Why low OIL hits india ??

Here is the list of reasons

The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news. Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies. For example, the share prices of Bharti Airtel and Bajaj Auto fell because of the devaluation of the Nigerian currency - Naira. Both the companies have a significant presence in the African country.

The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.

The government fixes the price of fuel at a subsidised rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government's total expenditure and leads to a rise in fiscal deficit - the amount it borrows from the markets. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit. However, since diesel was recently deregulated, the fall in oil prices will likely have less effect on the government's fiscal deficit. Moreover, the government still has to pay for previous under-recoveries. Any benefit from the fall will be offset by payments for the past under-recoveries.

Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies - directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%, according to a Moneycontrol report.

India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, according to a report by Livemint. This amounts to nearly 0.43% of the Gross Domestic Product - a measure of the size of the economy.

Source : Various channels