The outlook for oil prices is very volatile. In order to ensure flexibility in dealing with this problem, chemical manufacturer needs to build new organizational capabilities.
The drop in oil prices since mid-2014 has had a significant impact on the global chemical industry. Many producers are unprepared for the scale and speed of the impact on their businesses. Changes in the nature of oil supply and demand are expected to intensify volatility and increase the possibility of oil price shocks. Chemical manufacturer needs to develop organizational agility, prepare for the coming impact, and act quickly when the impact occurs to gain value and minimize the threat.
Starting from the second half of 2014, the unexpected sharp drop in oil prices caught many chemical manufacturers by surprise. After four years of relatively stable oil prices, some chemical manufacturers seem to have forgotten the inherent volatility of the oil market. These so-called return to normal low oil prices are expected to gain the upper hand in the medium-term market and be driven by fundamental changes in the supply and demand dynamics of the oil industry. Especially, in recent years, with the increase of new production, oil supply is increasing, including unconventional resources, such as light tight oil (LTO) in the United States, which is produced by horizontal drilling and shale hydraulic fracturing; new offshore oil and gas resources in Angola, Brazil, Nigeria, etc; And supply rebounds from countries that have experienced political or social unrest, such as Iraq and Libya. Since crude oil prices began to fall last year, the lack of action by the organization of petroleum exporting countries to cut production has exacerbated the impact of this supply. On the demand side, the slowdown is due to slower global economic growth, as well as historically high oil prices and carbon dioxide emission reduction plans to promote energy efficiency.
For the chemical industry, what is more worrying is that the possibility of supply side shocks will increase in the medium term. U.S. LTO and other growing oil sources tend to have high production decline rates, usually from 50% to 80% of peak production in a year. This may result in significant fluctuations in supply from these sources as production needs are constantly replaced. As the production of LTO can be started relatively quickly, if the oil price is too low, the producers will often delay the investment, and then rush in together with the rising oil price and the improvement of the economic situation, resulting in a rapid increase in supply. Production in some countries is also often unstable due to short-term disruptions caused by political and social unrest. Finally, in the face of falling oil prices in 2014, OPEC decided not to cut production in order to maintain its market share, which may indicate that its historical role as a global oil supply and price regulator is changing.
The combined effects of increased supply volatility and OPEC’s unwillingness to take action have increased the possibility of short-term supply and demand shocks in the global oil market, leading to rapid price surge and decline.
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