Crude Oil

11.1 The Commodities Super Star

Varun: Isha, I’ve been hearing that crude oil is the most important commodity in the world. Is that really true?

Isha: Absolutely, Varun. Crude oil is like the heartbeat of the global economy—it reacts to everything from wars to inflation to politics.

Varun: So it’s not just about fuel prices?

Isha: Not at all. Crude oil prices reflect global sentiment. When you look at its chart, it’s like watching a thriller—full of twists and turns.

Varun: Sounds intense. I guess there’s a lot to learn from its history.

Isha: Definitely. Let’s start by looking at how crude oil has behaved over the years and why it’s earned its superstar status.

If there’s one global commodity that captures the wild swings, emotional highs, and gut-wrenching lows of financial markets—almost like a blockbuster film—it’s crude oil. No other asset reflects global tensions, economic shifts, and speculative frenzy quite like it. From euphoric rallies to brutal crashes, crude oil charts often read like a thriller, making it the undisputed superstar of the commodities world.

This image is a 100-year historical chart of silver prices, adjusted for inflation to October 2022 USD. It offers a long-term perspective on how silver has performed across major economic cycles, geopolitical events, and market shifts from 1975 to 2025.

• 1980 Peak: Silver prices spiked dramatically around 1980, nearing $50 per ounce. This was driven by inflation fears, geopolitical tensions, and aggressive buying by the Hunt brothers, who attempted to corner the silver market.
• 1980s–1990s Decline:After the 1980 peak, prices fell sharply and remained subdued for decades, fluctuating mostly between $5 and $10, reflecting low inflation and stable industrial demand.
• 2000s Recovery: Starting in the early 2000s, silver began a gradual ascent, fuelled by rising commodity interest, industrial growth, and the weakening dollar. Prices reached around $15–$20 by 2008.
• 2011 Surge:Another major rally occurred in 2011, with prices approaching $45 per ounce, driven by post-financial crisis stimulus, investor demand, and concerns over fiat currency debasement.
• Post-2011 Correction: After the 2011 peak, silver prices declined steadily, bottoming near $15 by 2016. This period saw reduced investor interest and a shift toward equities and other assets.
• 2020–2022 Volatility: The shaded region around 2020 likely reflects the COVID-19 pandemic, during which silver experienced sharp price movements due to supply disruptions and safe-haven demand. Prices hovered between $20 and $25 during this time.
• 2025 Outlook: Toward the end of the chart, silver shows a modest upward trend, suggesting renewed interest possibly linked to industrial demand (e.g., solar panels, electronics) and inflation hedging.

This chart helps investors and analysts understand:

• Long-term price behaviour of silver
• How macroeconomic events influence commodity markets
• The cyclical nature of precious metals
• Inflation-adjusted value trends for better historical comparison

11.2 Crude Oil Crisis: Lessons from the Past, Signals for the Future

Varun: That 2014–2016 oil crash you mentioned—what actually caused it?

Isha: It was a perfect storm. U.S. shale oil flooded the market, OPEC couldn’t agree on cuts, and China’s demand slowed down.

Varun: And all that led to prices crashing?

Isha: Exactly. Prices fell from over $110 to just $28. And even now in 2025, we’re seeing similar patterns—oversupply, weak demand, and nervous investors.

Varun: So history might be repeating itself?

Isha: In some ways, yes. Let’s break down the key triggers and what they mean for today’s market.

The Price Collapse: Then and Now

Between 2014 and 2016, Brent crude oil prices fell from over $110 per barrel to just $28, marking one of the steepest declines in recent history. Fast forward to 2025, and while prices have stabilized, volatility remains. Brent currently trades around $63–$68 per barrel, with WTI averaging $56. The recent dip is driven by oversupply, sluggish demand, and geopolitical uncertainty, echoing the dynamics of the earlier crash.

Understanding the Oil Ecosystem

Crude oil is produced and exported by two major groups:

• OPEC nations: Saudi Arabia, UAE, Kuwait, Qatar, etc.
• Non-OPEC producers: Russia, Canada, Brazil, Mexico, Norway, and the United States

Together, these countries pump over 90 million barrels per day, with production levels influenced by domestic budgets, technology, and strategic interests.

What Went Wrong: The Four Triggers

1. Rise of American Shale Oil

The U.S. shale revolution, particularly in Texas and North Dakota, introduced vast new supply at competitive costs. By 2025, shale output remains strong, contributing to global oversupply. This displaced traditional OPEC exports and disrupted pricing power.

2. Lack of Coordinated Production Cuts

During the 2014–2016 crisis, OPEC struggled to convince members and non-members to cut output. In 2025, similar challenges persist. Although OPEC+ restored 2.72 million barrels/day between April and September, the market still faces a surplus of 0.7–0.8 million barrels/day.

3. China’s Demand Slowdown

China, once the world’s largest oil importer, has seen slower economic growth in recent years. This has reduced its appetite for crude, impacting global demand. Trade tensions and weak consumer sentiment continue to weigh on consumption.

4. Market Sentiment and Speculation

Heavy short positions and speculative trading amplified the sell-off. In 2025, risk aversion remains high, with investors reacting sharply to CPI data, trade policy shifts, and geopolitical headlines.

11.3 Currency Impact: The Dollar-Oil Relationship

Varun: Isha, I’ve noticed that when oil prices fall, the U.S. dollar seems to rise. Is that a coincidence?

Isha: Not at all. There’s a strong inverse relationship between oil and the dollar. When oil drops, the dollar often strengthens—especially against emerging market currencies.

Varun: That must affect countries like Russia and India differently, right?

Isha: Exactly. Russia suffers when oil falls, while India benefits from lower import bills—but it’s not all gain. Our exports to oil-rich countries can take a hit.

Varun: So crude oil impacts everything—from currencies to company profits?

Isha: You got it. Let’s explore how this dollar-oil link plays out and what it means for economies and markets.

Historically, oil and the U.S. dollar share an inverse relationship. When oil prices fall, the dollar tends to strengthen—especially against emerging market currencies. This dynamic continues in 2025, affecting trade balances and capital flows globally.

Case Study: Russia’s Economic Strain

Russia remains one of the largest non-OPEC oil producers. Its economy is deeply tied to oil exports, which account for nearly 40% of total exports. The 2014–2016 crash exposed three vulnerabilities:

1. Budget Pressure:Russia needed oil at $105–$107 to balance its budget. With prices below $70, fiscal stress persists.
2. Currency Weakness:The Russian ruble weakened sharply, prompting emergency rate hikes.
3. Sanctions and Isolation: Ongoing geopolitical tensions, including the Ukraine conflict, limit Russia’s access to global capital.

India’s Mixed Experience

India, a net importer of crude, benefits from lower oil prices through:

• Reduced petroleum subsidies
• Improved fiscal deficit
• Lower inflation
• Potential for interest rate cuts

However, there’s a downside. Many of India’s export partners—UAE, Saudi Arabia, Iran, and China—are oil-dependent economies. When oil prices fall, their spending contracts, impacting India’s export receipts. For example, in 2014, while India’s oil import bill dropped 19%, exports fell 5%, showing that the net benefit isn’t always straightforward.

Corporate Impact: Winners and Watchpoints

• State-owned oil marketing companies (OMCs) like HPCL, BPCL, and IOC benefit from lower crude prices. Reduced working capital needs allow them to retire debt and improve profitability. In recent years, BPCL and HPCL have cut short-term borrowings by over 50% and 30%, respectively.
• However, the long-term outlook depends on price stability. If crude remains near $50–$60, these companies can continue cleaning up their balance sheets. But renewed volatility could reverse gains.

Looking Ahead: Is This the Bottom?

• As of late 2025, the oil market remains fragile. OPEC+ has resumed production cuts, but U.S. exports are rising again after the lifting of a 40-year ban. The IEA warns of a potential surplus of 3.33 million barrels/day by 2026, raising concerns about future price pressure.
• Questions also linger around the financial health of shale producers. Are their balance sheets overstretched? Are reserves overstated? These uncertainties could trigger another wave of volatility.

11.4 Key Takeaways

• Crude oil is the most influential global commodity, reflecting economic trends, geopolitical shifts, and market sentiment.
• Oil prices are highly volatile, often reacting sharply to supply-demand imbalances, wars, and policy changes.
• The 2014–2016 oil crash was triggered by U.S. shale expansion, weak OPEC coordination, and slowing Chinese demand.
• In 2025, similar pressures persist, with Brent crude trading around $63–$68 and WTI near $56.
• OPEC+ production cuts have helped, but global oversupply and weak demand continue to weigh on prices.
• Speculative trading and market sentiment amplify oil price swings, especially during uncertain times.
• The U.S. dollar and crude oil share an inverse relationship, affecting global trade and capital flows.
• Russia’s economy remains vulnerable to oil price drops, facing budget stress and currency weakness.
• India benefits from lower oil prices, but reduced demand from oil-exporting trade partners can hurt exports.
• Oil price movements impact corporate performance, especially for state-owned oil marketing companies like BPCL and HPCL.

11.5 Fun Activity

2014–2016: Brent fell from $110 to $28

Select the correct Trigger Factors:

• Shale boom
• OPEC indecision
• China slowdown
• Speculation

Answer: All four combined to create the crash.