Oil prices dropped in early trading in Asia on Monday despite a fourth weekly fall in U.S. drilling activity, with analysts pointing to the weak economic outlook as the main reason for low crude prices.
The International Monetary Fund is likely to revise downwards its estimates for global economic growth due to slower growth in emerging economies, IMF head Christine Lagarde said in a newspaper interview.
Master Limited Partnerships (MLPs) have had investors flock towards them as they pay large dividends and offer tax advantages, but now they are in trouble. Pipeline and processing plant companies that are typical for this kind of partnership were long considered to be immune to market upheaval. This is no longer the case as the Alerian MLP index is underperforming other yield-oriented indexes while at the same time hitting a five-year low and being down 30% since the beginning of the year.
MLPs make money based on traffic volumes. Historically this has been considered a safe haven from price crashes as volumes never drop off as much as prices. This thinking has now been challenged by a recent deal between Chesapeake Energy Corp and pipeline operator Williams Cos Inc. that creates lower fees with an increase in volume.
Although there is wide disagreement on the future price of oil, there are some facts that almost everyone can agree on. First, that oil is an essential commodity (validated by the 94 million barrels of oil consumed in the world each day). Next, that economic growth drives oil demand in a reasonably predictable manner. And finally, that demand for a product increases when price drops.
Considering these demand principles, increasing oil demand this year seems a given. Despite the doom and gloom fog that never seems to lift from the business headlines, the global economy is still expected to expand by 3.3 per cent, and the energy intense developing economies are expected to grow by 4.2 percent.
India is concerned about an uptrend in oil prices which it considers inevitable. “We expect that next year, U.S. oil production will fall by 400,000 barrels per day because of projects not making economic sense … We may well see soon upwards pressure in price” said IEA Executive Director Fatih Birol at a press conference of the G20 energy ministers meeting. Global investments in oil are expected to be 20 percent less this year than in 2014. This reduction in upstream investment is the biggest decline in history. Oil projects are starting not to make economic sense.