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Fear of Oil Glut could lead to ME Real Estate & Economic Collapse !

November 27, 2014

I consider today’s OPEC announcement very important development that will provide further guideline about future global economic trend. There is huge risk that in coming days/months oil collapse will have contagion effect on global economies. Though Japanese and Indian PM have shown bearish mood and are happy with the falling oil prices. However, I have serious reservations, as falling oil prices will have sever negative impact on global economies. Japan that imports over 90 pct of its petroleum for its daily need of 4.5 million oil per barrel may see reduction in its oil bill. But for India that imports 80 pct of its oil and USD 150 billion for its oil bill may face different kind of risk. Similarly, fall in oil prices is extremely threatening for South Asian economies because Remittances is one of the largest economic growth contributor and continued falling oil prices distorts Middle Eastern budget/growth. There is a sever risk that it could lead to collapse in Middle Eastern Real Estate/ Construction projects. Softer oil could be good news for non-oil producing fast growing economies, but there are many risk attached to lower oil prices. I think with the current growth pace of shale oil production and funding need by some of the oil producing countries, due to fall in oil prices, there is a strong possibility that some of the OPEC members may not be willing to cut production and oil quota could remain unchanged. Since number of oil producers are faced with or likely to face deficit/funding shortfall, as their budget calculation is based around $ 90-100 per barrel that will hit their oil income and thus overall revenue. Hence, I will not be surprised if OPEC announces slash. But, if they do some of the oil producers will surely violates quota to meet their funding requirements, as quite a few economies are totally dependent on oil income. What could be more worrying for the oil producers is that while going some of the oil report/input, I found that the new projection says that the cost of shale oil production in 2015 will range between $ 50-69, which roughly averages to around $ 60. If this is true then it is a matter of grave concern for the oil producers, as we are about to enter the new calendar year. This is quite an alarming sign for the oil producing economies that totally depends on oil income. If my reading is correct then the oil market is surly heading for oil glut. Because for some of the oil producing countries, their economies may be not able to sustain low revenue collection at current quota. In such a situation oil price war cannot be ruled out in coming months. My view about building strategic oil reserves is that countries already having plenty of oil reserves may prefer to wait for market to stabilize and those unable to built reserves due to lack of oil reservoir have no choice, but to wait and watch as a silent spectator. Another bad news for oil producing countries is that due to excessive shale oil production in USA, which is going to increase next year, it will decrease US oil import. If my assessment is correct, it will have huge consequence not only on the oil producing economies. It will have contagion effect globally that could lead towards another financial disaster. Gulf economies could suffer most, as large part of their income is from oil. We should not ignore the fact that it is not only oil, which is suffering form price fall. Wheat, rice, sugar, gold, silver and steel prices are also down sharply by nearly 30-45 pct future projection commodity is worse. Construction and real estate is the next big business in oil producing countries, which is considered over valued. With steel prices already under pressure due to low demand. Global asset prices could come under sever pressure. Such a situation will deteriorate economic condition resulting pruning that could worsen job condition and fall in remittances. Now, from economic point of view, China oil buying is the only hope. But with economic slowdown how much oil will China buy? Strong Dollar is another factor that has weakened global currencies, which makes oil purchases tough. How much of oil will the world buy for its strategic reserves ? I do not see plenty of strategic oil buying in near future, as threat of Geo-political has also reduced to a great level. Therefore, Oil Glut will be unavoidable in near-term to medium-term.

http://blogs.platts.com/2014/11/21/oil-big-five-nov14-comments/?sf5903285=1

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