Oil prices have recently seen a significant decline following a series of oil supply forecasts from the Organization of the Petroleum Exporting Countries and its allies (OPEC+). OPEC+ cut oil production by approximately 5.85 million barrels per day, equivalent to about 5.7% of global supply. As this decline in oil prices continues, the question arises about the impact of this decline on global markets and various sectors of the oil industry.
Oil Price Drop and Market Expectations
Oil prices fell significantly last Monday, with Brent crude futures falling 0.4% to $71.91 per barrel, while US West Texas Intermediate crude fell 0.3% to $68.08 per barrel. This decline was driven by market expectations of increased or decreased supply from OPEC+, in addition to assessing the impact of the ceasefire talks between Russia and Ukraine. Opinions ranged from optimism about increased Russian oil exports to global markets as a result of the potential talks to concern about the expected increase in global supply from OPEC+. While some analysts expect increased Russian exports, others noted that increased OPEC+ production could lead to further oversupply in the market, putting pressure on prices.
Continued OPEC+ Cuts
Since 2022, OPEC+ has taken a series of measures to reduce oil production to support the markets. On March 3, OPEC+ confirmed that some members would continue to increase production by 138,000 barrels per day starting in April. Despite this increase in production, OPEC+ simultaneously decided to cut production by approximately 5.85 million barrels per day, raising questions about the impact of these measures on future oil prices. When officials announced this, some noted that these cuts might not be enough to offset the impact of US sanctions on Iran, which is driving price volatility in global markets.
Oil Price Outlook: What’s Next?
According to many financial analysts’ forecasts, oil prices may remain under pressure in the coming months due to geopolitical tensions and increased supply. Experts believe that oil will remain in a moderate price range, with Brent crude expected to reach around $70 per barrel between 2025 and 2026. A report by the International Energy Agency also indicated that the supply surplus resulting from OPEC+ decisions may keep oil prices low in the coming years.
Who will be affected by oil price fluctuations?
Oil and Gas Companies: Negative Impacts on Upstream Companies Oil and gas companies, which rely on crude oil production, face severe pressure due to the decline in oil prices. For example, every $5 per barrel drop in the price of oil reduces upstream companies’ earnings per share by approximately 8-10%. In the last three months, companies such as ONGC and Oil India have seen their shares decline significantly due to the decline in oil prices.
However, some companies may benefit from price corrections, making valuations more attractive to investors. Oil Marketing Companies: Mixed Impacts. Conversely, oil marketing companies may see an improvement in their marketing margins as a result of lower oil prices.
When prices drop by $1 per barrel, marketing margins for motor fuel increase by approximately 50 baisas per liter. However, these companies may face challenges due to the imposition of customs duties or lower retail prices by governments, which could negatively impact profit margins.
Natural Gas Distribution Sector: Slightly Positive Impacts. The natural gas distribution sector is expected to benefit from lower oil prices. Lower oil prices will help lower the cost of liquefied natural gas (LNG), which will lead to lower gas acquisition costs for gas distribution companies. Accordingly, this will contribute to lower prices in natural gas market.
Future Implications: Beneficiaries and Harmed Companies
With lower oil prices, some companies are likely to be well-positioned to benefit from these market changes, while others will face greater challenges. Overall, downstream and natural gas companies benefit most from lower prices, while upstream companies remain under significant pressure due to lower oil prices.
In the long term, geopolitical events and economic changes will likely keep the oil and gas sector volatile. While people focus on the expected impact of US sanctions on Iran and the war in Ukraine, OPEC+ continues to play a significant role in shaping future market direction.
Ultimately, expectations indicate that prices may continue to fluctuate in the coming months, and companies and investors should prepare for this scenario by adopting flexible strategies that mimic rapidly changing market dynamics.
Companies Operating from Lower Oil Prices
Upstream (Production) Companies: Production companies that rely on extracting crude oil, such as ONGC and Oil India, are among the companies most affected by oil prices. Any drop in the oil price directly impacts their revenues without their participation. According to some estimates, a $5 drop in the oil price could lead to an 8-10% drop in upstream revenue. As prices adjust, these companies will need to adjust, and many of them will continue to invest in new projects or expand production, which could affect their ability to adapt to the emergence of marketization.
Companies that rely on simple oil loans
Other companies, especially those that rely on supplying oil pipelines at high prices, may experience a decline in demand for their products if oil prices decline. This includes companies that begin supplying additional value-added products, such as industrial oils and petroleum derivatives, and that produce designs only for crude.
