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Oil hits 11-year low; Saudi-Iran tensions wipe out possibility of production cut

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 7, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - Oil woe continues in the current year as Brent crude fell below $35 a barrel for the first time in 11 years yesterday. Brent crude sank by 4.2% to $34.88 a barrel, surpassing its late December fall, and taking the price to its lowest level since 1 July 2004. The price of US crude dropped 3.3% to $34.77 a barrel. Oil further dropped today hitting $32.62 a barrel on rising US stockpiles and devaluation of the Chinese yuan. US WTI was down 3.9%, the lowest since the $32.40 level touched in December 2008. Oil price had rallied briefly on Monday following supply concern which was primarily the result of the Saudi-Iran face-off.

    Oil prices are currently 70% lower in value than the peak touched in June 2014. International Energy Agency said the oil price plunge since June 2014 that has reduced OPEC revenue by nearly $500 billion a year is the result of excessive pumping. Disregarding the global oil glut, The OPEC decided to increase its collective output ceiling to 31.5 million barrels per day (bpd) from the previous 30 million at the Vienna meeting on December 4th.

    The rising inventory in the US brings in more bad news for oil traders. According to government data US crude production has recently increased by 17,000 barrels a day, taking it to 9.22 million barrels a day. It has marked the fourth consecutive week of increases.

    Add to this, Saudi Arabia’s fall out with Tehran has now almost put off any possibility of the two of OPEC’s largest producers arriving at a decision to control production. Alia Moubayed, analyst at Barclays rightly opined that "With relations between Opec kingpins Saudi Arabia and Iran at a historic low point, it solidifies an already unlikely scenario that OPEC might cut output”.

    When on one hand supply is on the rise, the demand on the other is seen to be declining At the same time on account of the slowdown in economic growth in China and Europe. Crude demand usually falls when the US dollar is stronger against a basket of currencies of the countries who are the main purchasers. With the PBoC lowering the yuan, it is obvious that oil demand in China which is world's biggest energy consumer, will fall. The news of the Chinese currency devaluation has thus raised hell in the oil market.

    Given the oversupply, even the US, which is believed to have the largest storage facilities in the world, has no more place left to store oil. According to Paul Stevens, professor emeritus at the University of Dundee and a Middle East specialist, "Storage is pretty much full and people are already talking about buying tankers as floating storage”. In a situation like this, the only thing that can probably be done is sell oil and because there is more quantity than that can be consumed, prices can be expected to further dip. Goldman Sachs warned oil prices can likely fall as low as $20 a barrel.


    Saudi-Iran tension cannot boost oil


    Mehdi Asali, Iran's director general of Opec affairs admitted tensions which have risen over Saudi Arabia’s execution of Shiite cleric cannot have a long term impact on oil. Export from Iran is likely to rise this year once the Western sanctions are off. An Iranian official had earlier argued “We’ve already reduced our production due to sanctions,” referring to the 1 million barrels a day of output the country lost after sanctions were imposed in 2012. The official said the Saudis benefited from Iran’s loss. From his statement it is evident that Iran will not let a crisis come in its way of doubling production and export. Iranian oil exports are also expected to rise later this year once Western sanctions against Tehran for its nuclear programme are lifted, increasing the oversupply of oil. Iran will likely add an extra 500,000 barrels a day to the world's supply within weeks of removal of the sanction.

    The Saudis have already been pumping record volumes (in excess of 10m-barrels-a-day) to defend their market share and eventually drive out US shale producers from the market. Alia Moubayed at Barclays feels that the latest conflict between Saudi Arabia and Iran will lead Saudis to "dig in its heels to keep output at or even above current levels". Saudi Arabia's oil minister said the kingdom will continue pumping as it believes global demand to pick up in 2016.

    The initial concern that supply will be disrupted on account of the rising tensions between the two heavy-weights no longer hold ground. In fact the tension has destroyed whatever little chance there was of OPEC agreeing to a production cut.
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