Oil: Is it in freefall and what it means

By Barigye Kiiza

“OPEC will not cut its oil output to support prices but expects higher-cost producers to do so, the United Arab Emirates energy minister insisted on Tuesday as oil plunged near six-year lows”.

One Suhail bin Mohammed al-Mazroui was speaking at the meeting when the price of Brent crude dropped to a low of $45 instantly!

Oil, a commodity that is widely consumed by several countries indirectly and directly. The exporting countries like Australia and Russia are getting the bite of the slump of the lucrative commodity. The oil reversal has been seen by the prices of Brent crude trading on several financial market exchanges within a range of $44 and $65.

The supply and demand of oil is one micro element that shall keep the oil falling as the price gets lower. The supply of the commodity is not in any way linked and equal to the demand.

Companies listed on the New York Stock Exchange and also major components under the benchmark index S&P 500. These including; ExxonMobil and Petrogas to mention but a few dragged the performance of the economy monitoring index. The slump caused currencies of oil backing countries like the Australian dollar and the Russian Ruble suffer severely due to the slump.

The general trend of the brent is downward slopping as seen in the chart. Oil as per 2014, has been trading at 100 day average at a price of $54.

Keeping in mind that a barrel of oil contains 189 litres of oil. In the last 50 days, the price of oil has been $50 a barrel. Market price recorded on 10am GMT +3:00 showed that the price from a source investing.com had fallen to $44 a barrel. This was after sentimental support from the OPEC officials that even if the price falls to as low as $20, nothing shall be done to stop its fall.

Creating an indicator that the reversal back higher shall be solely dependent on the microeconomic factor of supply and demand becoming equal.

Oil is used in several energies globally to produce synthetics and other products that are imported and exported. The linkage of the oil with a value based dollar means that there is a probable chance for the reversal to come. Ugandan traders are at the moment coming to terms with the depreciating shilling and the increase in taxes due to the appreciating dollar.

The effect of oil on fuel prices in Uganda and other oil backed imports and exports has not been seen as yet. At least in the past six two months since the OPEC met. This is due to several factors of which the most relevant and essential being the strength and volume of the global oil price drop has not been tested here.

Countries that are directly involved in the production and exportation of oil like Australia are affected in a way where the detriment is seen on the currency under study and the base.

For example, the AUD/USD has fallen to fresh five year lows currently trading at 0.800; as for Uganda, reliance is put on other countries that first feel the bite of the oil slump till we in turn get the bite. These being Russia and Australia.

The continuing varying levels of supply of oil and its demand shall keep the fall and a global price of $20 a barrel shall not make the responsible bodies like the OPEC do something!

This still remains unlikely as necessary measures are being taken by the central banks in these countries.

The writer is a financial analyst and investment fund manager