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A Drop of OIL

| 5/16/2013 9:00 PM Thursday

Crude oil prices have been slipping in the global markets, with economists and investors standing by cheering this fall. Changes in the crude market have rewritten old equations afresh. How long will the tumbling of the barrels sustain?Shrikant Akolkar finds out

Crude oil is the most important commodity that fuels the world economy. Changing crude oil prices make a huge impact not only on the developed economies but also on the developing and under-developed ones. It is no secret that this is the prime reason why oil is at the centre of international politics. No wonders the world has seen several wars being orchestrated in the Gulf region, the wellspring of the world’s oil reserves. 

Crude oil is, for all practical purposes, a measure of global economic growth. This time around, crude has made it to the news on account of a fall in prices. The same ‘black gold’ that once gave the finance ministers of many countries sleepless nights has seen over 10 per cent fall in prices in the first four months of this year. Such a steep fall is the first of its kind in the last 10 years.

After this, many market pundits have become bearish on crude oil. As for India, the fall augurs well to reduce the twin deficits. Inflation would also witness further easing, which would lead the RBI to cut the key interest rates faster. Here, one needs to understand why the price has witnessed such a decline and secondly, where it will stop. Investors would also be seeking a near-term outlook of this energy commodity. But let us first take a look at why crude has fallen.

Structural Change In The Crude Oil Market

Before one dwells on the depth of the fall, it must be understood that the crude oil market is undergoing a few structural changes. Earlier, crude production had been a major business of the OPEC (Organization of the Petroleum Exporting Countries) countries. Besides, the demand for oil has always been higher than the supply, which is why the prices of this commodity rose historically.

Taking a look at the demand-supply scenario, as per the International Energy Association (IEA), the oil supply has outrun the demand in calendar year 2012. The same trend has continued in the first quarter of CY2013. The supply has also been increasing consistently over the last three quarters, which is a major reason for the oil prices seeing a fall. This is no rocket science – the most elementary rule of economics is sufficient to understand this logic.

 

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