The global price benchmark index, which is used for around two-thirds of internationally traded crude oil supplies, is on the verge of collapse. Some would say it’s already as low as it can get yet other’s would say the worst it yet to come. Whatever the opinion, Market Analysts never fail to remind us, with incessant news articles and reports, pinging away to glory on our app-overloaded smartphones.
The reason behind the fall of Brent Crude are actually one too many. From the boom of the US Fracking Industry, to the delayed response of OPEC to freeze oil output. Russia’s adamant refusal to cut output for fear of losing market share. The economic mismanagement of Venezuela along with the sadistic greed of the Middle-East to remain an oil superpower. All of this read in light of the revelation at Davos, where it was evident that “the global economy seems to be hanging in balance”, sounds like a recipe for disaster, which is fast materializing.
America’s determination to achieve self-sustenance in the energy industry is proving counter-productive. So much so that they have ended up exporting oil to countries which already have abundant reserves! What could be more indicative of excess supply than that? Brent Crude has settled for now at $ 35 / Barrel range, after dilly dallying between $ 29 and $ 35 throughout the week.
So why does any of this matter for you? You as a consumer, or a manufacturer, or service provider. What difference does this make?
A consumer would be elated since less expenditure on fuel implies greater income available to expend in different ways. This emotion percolates to our manufacturer’s / business organizations / service providers as well. Fuel is an unavoidable cost across sectors, and its drop serves as a welcome relief for the overburdened cost centres which characterize our economy.
From the short term perspective, it appears that fluctuating Brent Crude is favourable, facilitative and a harbinger of all good things to come. Higher disposable incomes (minus the fuel) result in higher sales (from the business angle), increasing profits and cash flow (hypothetically) spreading joy all around. Yet as Isaac Newton once said, “what goes up must come down”.
On the other side of the world, big players like Royal Dutch Shell and Schlumberger have at present cut an additional 30,000 jobs in 2016. Put together, more than 2,00,000 layoffs have taken place this financial year across allied verticals, with an imminent threat that it’s not the end.
Firms feeling the pressure of Black Gold, down-sizing of operations, further retrenchment and all that follows. We may be looking at the crumble of our economy, without even realizing its enormity.
The only way to weather this storm is to wait it out. Keep an eye and ear out for cross border verdicts. Be aware of market trends. Strategize business processes and outlay to at best maintain profits, or delay losses (depending on how well you are doing as of now). It is not wrong to take advantage of the price swings, as long as you have a contingency plan for the times when they start working against you.
(This blog post is authored by Netra Prakash, Business Analyst at SansPareil - www.sp-cag.com)