[RSR]

I whole-heartedly welcome sustained low international prices for crude oil and natural gas. I seriously hope it stays low for a few years at least, or gets even lower! The benefits to the whole of humankind are tremendous and unquantifiable - not just in merely financial terms, but in many more serious ways as well! The biggest beneficiaries would be the countries and peoples of the Third World.

I hope members of the OPEC cartel let common sense prevail and decide not to cut the production of crude oil or natural gas. If they are smart, they would infact decide to use the current low prices to increase their marketshare and find new customers. Cutting back on production with the aim of artificially boosting prices is going to hurt them seriously in the long run, and there would be no going back from that situation.

Countries with shale reserves who are looking to develop those resources may find their plans questioned from several angles (financial, environmental, technological etc.) in such a scenario. Such countries/companies would be committing a serious blunder if they decide to shelve plans to develop shale resources or put them on the back burner. Conventional wisdom simply does not work in such a complicated scenario - it would prove to be counterproductive.

This is in fact the BEST time for countries & companies controlling shale reserves to put plans in place to exploit them in a big way. I seriously hope the governments of Canada and the USA push forward rapidly and relentlessly on their shale utilisation agenda now. There simply can be no better time than this - although conventional wisdom would scream otherwise, and big financial lenders who cannot think beyond recovering their loans in time would be unwilling to take such a risk. This is where the governments of these two countries would have to step in and accord it top priority on their agendas. It merely requires a little out-of-the-box thinking by those who set the agenda. If they are willing to do this now, they can succeed in this crooked game and reap massive rewards in the future. Why, they can even turn their two (already advanced) countries into paradise on Earth! For it's highly unlikely that these two countries would fall prey to the dreaded and misleadingly named resource curse*.

What does this game hold for those in the alternate energy field, especially those in the automotive industry who are involved in electrics & fuel cells (and to a lesser extent, hybrids too)? Sadly, it is these fine folks who would be affected the most by sustained low prices for crude oil and natural gas in the long run, and by the development of shale reserves. If fuel prices remain affordable for a long time, the automobile industry would certainly cut funding for their alternate fuel programs. Internal combustion engines would continue to be the preferred power source for automobiles and it would take longer for the IC engine to give up its place under the hood to an electric motor.

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* - A natural resource is a blessing, and not a curse. Countries afflicted by the deadly "resource curse" are not cursed because of their natural resources, but because of their human resources! Their human resources (especially the ruling ones) lack the quality and ethics to utilise their natural resources to the benefit of their societies and peoples. Instead, a small ruling elite skims off all the wealth generated from the natural resources, puts in place a tyranny and maintains the same through brutality. The hapless, impoverished population is forced to live under the terror unleashed by such a power hungry, incorrigibly corrupt ruling elite. They then keep wondering if their countries have been afflicted by the dreaded "resource curse", which is nothing but a figment of their imagination. The problem lies elsewhere.

[sgiitk]

OPEC has a problem. Many members (and non-members) do not want to cut production, even though with welfare programmes running many incl KSA need Brent at $100+ to break even. A lot of this may have to do with shale fuel opening up. Now with the big chill I will expect some hardening.

[hellmet]

Originally Posted by RSR

I whole-heartedly welcome sustained low international prices for crude oil and natural gas. I seriously hope it stays low for a few years at least, or gets even lower! The benefits to the whole of humankind are tremendous and unquantifiable - not just in merely financial terms, but in many more serious ways as well! The biggest beneficiaries would be the countries and peoples of the Third World.

I'm quite appalled at the prices that crude is beginning to reach. Crude oil is a very precious resource that takes millions of years to form, but man has decided to put a (cheap) price on nature's toil and is using it in the most inefficient way possible. A human would have to labor more than 10 years to equal a barrel of oil worth in energy.

A gasoline engine with an exhaust pipe (that dumps garbage on its way into the air) for everybody will be planet Earth's worst nightmare and low prices will ensure the continuance of this madness.

Originally Posted by RSR

I hope members of the OPEC cartel let common sense prevail and decide not to cut the production of crude oil or natural gas. If they are smart, they would infact decide to use the current low prices to increase their marketshare and find new customers. Cutting back on production with the aim of artificially boosting prices is going to hurt them seriously in the long run, and there would be no going back from that situation.

Low prices hurt OPEC nation's own government spending and welfare programs, so they will have to cut production soon.

Originally Posted by RSR

This is in fact the BEST time for countries & companies controlling shale reserves to put plans in place to exploit them in a big way. I seriously hope the governments of Canada and the USA push forward rapidly and relentlessly on their shale utilisation agenda now.

Why, they can even turn their two (already advanced) countries into paradise on Earth!

Please take time to read and watch fracking and tar-sand extraction has done to New York and Canada's rich forests. Paradises in Canada are being ripped away just so some people can drive to work in their 5kmpl vehicles.

Originally Posted by RSR

it would take longer for the IC engine to give up its place under the hood to an electric motor.

Electric or ICE, a vehicle per every person is a bad idea and the sooner we convince our governments of the same the better. We need shared, and/or public transport taking us places, not a heat generator under everyone's behind.

[pgsagar]

Originally Posted by hellmet

I'm quite appalled at the prices that crude is beginning to reach. Crude oil is a very precious resource that takes millions of years to form, but man has decided to put a (cheap) price on nature's toil and is using it in the most inefficient way possible. A human would have to labor more than 10 years to equal a barrel of oil worth in energy.

A gasoline engine with an exhaust pipe (that dumps garbage on its way into the air) for everybody will be planet Earth's worst nightmare and low prices will ensure the continuance of this madness.



Low prices hurt OPEC nation's own government spending and welfare programs, so they will have to cut production soon.



Please take time to read and watch fracking and tar-sand extraction has done to New York and Canada's rich forests. Paradises in Canada are being ripped away just so some people can drive to work in their 5kmpl vehicles.



Electric or ICE, a vehicle per every person is a bad idea and the sooner we convince our governments of the same the better. We need shared, and/or public transport taking us places, not a heat generator under everyone's behind.

I am more worried about India and its problems than OPEC's problems. I have no sympathy for OPEC nations. This cartel has made heaps of moolah off third world nations ( of course , so has successive Indian Govts. by taxing petrol to heaves ). Beats me why you should feel so much pain for OPEC nations.

And coming to cars, just wondering what car do you drive. That is IF you do own any car.

[hellmet]

Originally Posted by pgsagar

Beats me why you should feel so much pain for OPEC nations.

I don't care for OPEC, my concern is for the planet's future. Why did you assume I felt "pain" for OPEC? OPEC nations' welfare is dependent on high crude prices, and they'll eventually have to cut production to increase fuel prices - that's what I meant. Please read more about OPEC welfare on the 'net.

[carZest]

I detected a fair bit of sarcasm in RSR's post, but going by above comments maybe I am wrong

[hellmet]

Originally Posted by carZest

I detected a fair bit of sarcasm in RSR's post, but going by above comments maybe I am wrong

Aah, I see now! Sorry about my venting.

[saurabhkum]

OPEC is not going to cut it's production so easily. If the crude goes below 70$ then it may not be financially wise for US and Canada to continue their output , in such case the supply will automatically get reduced and prices will climb up. I think between 70-80$ should be the stabilized rate for crude in near future. If our Oil Marketing companies agree then the the price can further reduce by approx 8-10 Rs per liter of Petrol.

The drop in crude prices should have resulted in almost 30% drop in the cost of Petrol/Diesel but for some unknow reasons the benefit is still not passed . Actually only 50% of the benefit is passed to us , which is a question that are the prices really de-regulated? Few articles which might be worth reading are given in link below.

http://profit.ndtv.com/news/economy/...es-true-704402

http://www.independent.co.uk/news/bu...d-9883489.html

Let's see how they react on this month end. More than the landing cost it's the taxes which adds to our fuel cost, is it good or bad is a point of debate with no outcome. Anyways I'm looking forward for the extent of price cut for this month end.

[ILTDrive]

From the news coming it, production cut seems highly unlikely.

Reported news.
http://timesofindia.indiatimes.com/b...w/45293406.cms

[sgiitk]

It seems to impact Shale Oil WTI has to drop below $50!

[vjjustin]

Originally Posted by saurabhkum

The drop in crude prices should have resulted in almost 30% drop in the cost of Petrol/Diesel but for some unknow reasons the benefit is still not passed . Actually only 50% of the benefit is passed to us , which is a question that are the prices really de-regulated? Few articles which might be worth reading are given in link below.

I am not sure about specifics in the Indian petroleum business; but the future trading sure has an impact on the prices (If the prices fluctuate a lot, that will have a serious impact on the profitability of the petroleum companies. So, they want to mitigate this risk and opt for future contracts. Future contracts in essence, assure a certain quantity of crude at a future date at a pre-determined price.). This practice (by definition) kind of provides a cushion effect and mitigate/slow down the impact of market fluctuations.

Say 20% of crude comes through future contracts; even if the price drops by 30%, this do not immediately translate into 30% more profits as 20% of the crude is still bought at the (more or less) old prices (various contracts must have been signed at 3/6/9 months or 1/2 years back and the prices reflects the then market prices). Depending upon the percentage of crude that is bought on current vs future contracts (and prices), and the length of these future contracts, the companies might take 3 months – 1 year to reap in full benefits of this price reduction. (Hope I am not confusing anyone.)

In nutshell, be patient!!!


Edit: Just to add to it, the independent article linked above (and below) says "...as recently as August the futures market was pricing oil today at over $100 a barrel." http://www.independent.co.uk/news/bu...d-9883489.html

[saurabhkum]

The future trading is an option contract and not a bonded contract, which means that you pay an advance of say 2$ today to get the crude at say 80$ with delivery of January 2015. In this model you have an option of not taking the delivery if the price of crude drops by more than 2$, your loss is limited to 2$. Even if we take that it's a bonded contract still the companies make bonded contract for not more than 25% of the total purchase, in such case also the prices should have been corrected by almost 24%. AFAIK Indian Oil Marketing companies are more into currency hedging where they fix the Re to Dollar conversion rate and book in advance.

[vjjustin]

Originally Posted by saurabhkum

The future trading is an option contract and not a bonded contract, which means that you pay an advance of say 2$ today to get the crude at say 80$ with delivery of January 2015. In this model you have an option of not taking the delivery if the price of crude drops by more than 2$, your loss is limited to 2$. Even if we take that it's a bonded contract still the companies make bonded contract for not more than 25% of the total purchase, in such case also the prices should have been corrected by almost 24%. AFAIK Indian Oil Marketing companies are more into currency hedging where they fix the Re to Dollar conversion rate and book in advance.

Options and Futures are two different financial instruments. You are probably confused with a ‘Commodity Option’ or a ‘Future Option’, both, as the name suggests, are indeed options not futures (Your example is a Commodity Option, not a Future). But both are certainly different from a Futures contract.

Even if these companies are using only Options instead of Futures (highly unlikely, Options are way too costly and requires significant investment compared to Futures), they still need to offset the losses occurred in buying these options. Even a 5% margin, (It should ideally be far more than that -high risk and high price volatility means high margin) will still have an impact on the final pricing. I repeat I am not sure about the actual portfolio or specific trading practices, just common sense.

Also, currency hedging and futures contract serve entirely different purpose. Forex fluctuations are just one of the many risks that the petroleum companies have to deal with. It will be high risky and highly unlikely, if petroleum companies avoid futures just because they do currency hedging.

[ramanak]

Originally Posted by sgiitk

It seems to impact Shale Oil WTI has to drop below $50!

Very clearly this is what OPEC is out to do ,i.e. To price out Shale guys.But it looks unlikely that Prices will fall to 50 Dollars.What's your take?

[drsingh]

Originally Posted by ramanak

Very clearly this is what OPEC is out to do ,i.e. To price out Shale guys.But it looks unlikely that Prices will fall to 50 Dollars.What's your take?

Well. The OPEC guys can't undercut the US at 80 $ , they can most likely undercut at 50 $ . If the OPEC fails to cut production, and there is no adverse geopolitical event, 50 $ may be a reasonable bet.