The sharp drop in crude prices is threatening to make it unviable for companies that have invested in alternative fuel projects, like shale gas and LNG.
Brent crude touched $82 a barrel in global market on Tuesday, with some analysts projecting that it might fall to as low as $60 a barrel in the near future.
Some analysts say panic will set in if the price drops below $70 level, resulting in a further plunge.
Experts believe while government finances and domestic companies may continue to enjoy the benefits in the short term, a further fall in crude prices may make it unviable for companies that have invested in shale gas and LNG businesses.
Brent price has dropped over 30 per cent to $82 a barrel from $115 in June due to rising production, slowing global demand and the absence of clear signals from the Organisation of the Petroleum Exporting Countries (Opec) that it would cut output at a November 27 meeting. Price of West Texas intermediate (WTI) crude has slumped 2.03 per cent to $77.18 a barrel.
Oil production by Opec members is at a two-year high, which has resulted in doubling of supplies at 1.4 million barrels a day while the incremental increase in demand stands at around 0.7 million barrels a day.
Debasis Mishra, senior director for oil and gas at Deloitte, said the whole situation had arisen due to a slowdown in demand and the unprecedented supply rampup coupled with the unwillingness of key Opec members to cut production.
“A lot of conspiracy theories are also floating around that it is aimed at putting pressure on political regimes in Russia, Iran and Venezeula, which are overwhelmingly dependent on oil revenues,” Mishra said.
This point was corroborated by Sumit Pokharna, deputy vice-president at Kotak Securities, who said Saudi Arabia and the US have been fighting a price war, which could be a win-win for both.
“If the fall in oil prices continues unabated, it would put serious pressure on producers of alternative fuels – shale and tight gas – as they would no longer remain competitive against crude. Most producers balance lower gas price by selling shale oil at higher rates. But if crude prices fall, it would be difficult to keep gas prices lower in the range of $3-$4 per million metric British thermal unit (mmBtu). This will have a spiral effect on all dependent sectors, where the cost of fuel would increase manifold,” said Pokharna.
KK Gupta, director of marketing at BPCL, said the drop in crude prices was good for Indian companies. “However, there may be slight impact on margins as product prices are defined globally and our prices will adjust to them.”
He declined to comment on the geopolitical aspects affecting crude price and also the global conspiracy theories doing the rounds.
Pokharna of Kotak Securities said investors should be watchful of the US currency. “In future if the dollar weakens, it can impact commodity prices inversely, which means crude prices may spiral up once again.”
A lot would depend on the situation in Libya and Iran. Libya has increased crude production to 9,00,000 bpd from 2,00,000 bpd earlier, and it is expected to shoot up to 2 million barrels a day.
Similarly, oil production in Iraq may go up to 6 million barrels a day from the existing 4 million barrels. All this would result in a steady drop in crude prices unless big economies like China, euro zone and India expand substantially, raising demand.