The oil and gas commodities markets are in a state of constant change. An imbalance of supply and demand along with an unstable global economy are impacting all commodities across ags, energy, and metals, however the oil and gas industry is especially sensitive to these events. Here are 3 key factors contributing to the instability:
Since December 2014, the dollar has been trading above a 5 year high. With a strong outlook for near term growth, the US is set to continue outperforming most of the global economy and will increase rates for the first time in years.
The US dollar and commodity prices are generally inversely related, i.e. a strong dollar = weak commodity prices. As the dollar continues to rise, the value of commodities continues to decline, which you can see from the multi-year lows in prices across all commodities. Therefore, dollar priced oil contracts are particularly volatile and fluctuate with the slightest change in the value of the dollar.
The global economic outlook is trending down. China’s economy is slowing, with factory output down in 2015 and growth forecasted to be in the single digits. Additionally, Europe’s debt issues are causing a continuing recession in countries like Greece, Spain, and France. This decrease in economic growth indicates lower energy demands for the coming year, which along with surplus supply will almost certainly force prices even lower.
What is commonly referred to as the “miracle” of US shale production was previously seen as a promising way to offset the loss of oil production in Middle Eastern and African countries. However, global oil markets are now seeing an oversupply of 1-2 million barrels per day due to the drastic increases in production in the US and other oil-producing nations such as Iran, Iraq, and Angola. Flooding the market with increased production has driven the price of crude oil down to a 6-and-a-half year low of around $40 a barrel, and there are no signs of OPEC changing quotas or non-OPEC countries slowing down production. Learn more in "Falling Oil Prices and the Need for ETRM Software."
Recovery for the oil markets will take a while. Even if demand picks up, excess stocks will remain a problem. On top of that, there are increasing external factors like geopolitical conflicts and economic uncertainty impacting oil markets, making it more difficult to predict supply and demand levels. This creates high price risk and volatility for oil and gas trading companies.
Keeping pace with the rapid changes in the market is challenging: managing the purchase, refining, blending, storage, transportation, sales, distribution, and trading of crude oil can be complex, expensive, and time-consuming. In order to remain competitive, oil and gas marketers, refiners, and exploration and production (E&P) companies need an advanced ETRM software solution to mitigate risk and optimize decision-making. The advantages of a system like Eka's InSight CM solution go beyond just transaction capture. It allows you to analyze internal and external market data including full FX capability, gain real-time insights, and discover invisible risks to your business.