In the past 3 months, Brent crude oil prices have declined by 23.14% to $95.42 from its high of $124.15. Though for India, domestic crude prices continue to remain higher on account of weak local currency against the US dollar.
Reasons for the recent decline in Brent prices include the issues in Iran and the economic problems in the Euro zone. Vijay Bhambwani, CEO, BSPLindia.com, says, “Usually, there are three kinds of premiums attached to crude oil prices – political, speculative and terror.
Currently, crude oil prices have fallen because the US has managed to keep the speculative premium low by its announcements of energy independence by 2020 and moreover the terror premium is also low, as pirates in Somalia are under control.” It makes good politics for US to keep crude oil prices lower especially when elections are round the corner, said Bhambwani.
In 2011, the US consumed 18.8 million barrels per day (mbpd) of petroleum products, making it the largest petroleum consumer in the world. But US petroleum products imports have been declining for some time now. According to recent note from the US Energy Information Administration (EIA), “the share of total U.S. consumption met by total liquid fuel net imports (including both crude oil and products) has been falling since peaking at over 60% in 2005, and averaged 45% in 2011, down from 49% in 2010.” The decline in US oil imports is a result of improved domestic supplies and decline in consumption on account of economic slowdown after 2008 and better efficiency.
In the US, not only domestic gas but even crude oil production is increasing at rapid rate. According to EIA, total marketed production of natural gas grew by 7.9% in 2011 driven in large part by increases in shale gas production. The shale gas boom in the US has taken domestic gas prices very low, so much so that it has adversely affected drilling activity. Shale gas is expected to be a potential game changer in future.
For one, natural gas could be substituted for oil in the transportation sector. If that happens, then it is likely to adversely impact fuel demand. According to Madhavi Mehta of Kotak Commodity Services Ltd, increasing supplies and muted demand in the US is likely to put pressure on West Texas Intermediate (WTI) crude prices eventually. Currently, WTI prices (which are more US centric) are already under pressure because of higher stocks and sluggish demand, adds Mehta.
Some analysts also maintain that reduction in US oil imports and at the same time, increasing supplies, will put pressure on Brent prices too eventually. Of course much depends on how the demand remains in the emerging markets and the Euro zone and geopolitical situations across the world. Moreover, the supplies in US need to be sustained.
In a note to clients in March, Citi Global Perspectives & Solutions pointed out, “Whether the increase in production results in the US reducing its imports or whether net exports grow doesn’t matter much to world balances. Either way, North America is becoming the new Middle East. The only thing that can stop this is politics -- environmentalists getting the upper hand over supply in the US, for instance; or First Nations impeding pipeline expansion in Canada; or Mexican production continuing to trip over the Mexican Constitution, impeding foreign investment or technology transfers — in North America itself.” If supplies continue to increase in the US, the world energy scene is set for a dramatic change and in the long run, prices are likely to trend downwards.