Oil woe continues as price slips again on inventory data

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Crude oil collapsed by more than 65% to a 12-year low yesterday, falling below the $30-per-barrel level. U.S. WTI settled at $30.44 a barrel an after having slipped to $29.93, first time since 2003. WTI marked a loss of 3.1 per cent. Brent on the other hand fell 69 cents settle at $30.86.The first two weeks of 2016 has seen large oil selloff which has slashed almost 20 per cent off prices. Oil price moved down by about two-thirds since July 2014. Slowing down of the Chinese economy has raised worries of further drop in oil demand in the world’s second largest oil consuming market. Strengthening of the US dollar is another factor that is weighing oil price. Production is on the rise as OPEC refuses to budge from its policy of pumping record volumes to defend market share.

    Prices continue to be hit

    Yesterday’s slide in prices sparked fears that oil will fall below the $30 per barrel threshold. Following this decline, the Nigerian minister for Petroleum resources and OPEC President Emmanuel Ibe Kachikwu went on record to state that he expects an extraordinary meeting to be held in March to address the problem of low oil prices. He said that the objective of such a meeting “would be to review policy and see if there is a need to change strategy”. Kachikwu’s statement was however quickly dismissed by UAE Energy Minister Suhail al-Mazrouei. UAE’s minister argued “I am not convinced that Opec solely, unilaterally can change the strategy just because we have seen the low in the market.” One of OPEC’s major producers Iran has also denied receiving any calls for a special meeting.

    Possibility of an emergency meeting to revise strategy with the objective to control prices moved up oil prices causing crude to climb above $32 a barrel. However, following UAE’s dismissal of any such possibility, prices fell 4 per cent.

    Oil price increased slightly today given that China imported a record amount of crude as slump in oil price prompted stockpiling. WTI jumping as much as 2.2 per cent in the Asian trading hours and Brent crude increased as much as 1.6 per cent. However, even after the slight gains prices remain critically low levels. WTI was below $31 a barrel; while Brent was noted to be trading at $31.02 a barrel. The price gains were also prompted by the sudden decline in U.S. crude oil stocks.

    However, the gains registered earlier in the day was lost as inventory data from the U.S. Energy Information Administration showed inventories of crude oil and refined products at new record highs. Stockpile of crude oil was noted to have risen 234,000 barrels last week.

    Barclays analysts revised their oil-price forecast for 2016 down as there is nothing in sight to suggest a possibility of an increase in price. The forecast for the average price of Brent and WTI respectively to $37 per barrel in 2016, down from $60 and $56 previously.

    Impact on world economies

    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. 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. OPEC had in November 2014 abandoned its earlier policy of controlling oil price and adopted the market share strategy championed by Saudi Arabia to drive out US shale producers from the market. The strategy resulted in slump in oil price which has led OPEC to incur huge financial costs.

    With the current tension between Saudi Arabia and Tehran, any possibility of the two of OPEC’s largest producers arriving at a decision to control production has been put off. 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”.

    Global crude production is estimated to have exceeded by between half a million and 2 million barrels per day. Production is expected to further increase this year as Iran moves up exports post the removal of the Western sanctions. Trade sources quoted by Reuters expressed concerns over Iraq’s plan to export a record of around 3.63 million barrels per day in February.

    Dan Yergin, vice chairman of consultancy IHS, told CNBC that both geo-political and geo-economic factors are hurting oil price. He too sees little possibility of any production cut by Saudi Arabia and the Gulf countries “to make room for Iran coming back into the market”. He has also flagged the concern over China’s slowdown which economists fear will cause further uncertainties in the oil market. Doug Gordon, senior portfolio manager at Russell Investments while speaking to CNBC today also agreed that there are substantial risks posed by slowdown in China. U.S. bank Morgan Stanley feels "The imbalance in the global oil market has been diminishing in 2H15, but the hope for a rebalancing in 2016 continues to suffer serious setbacks”.

    The global oil glut will likely continue to plague markets in 2016. Output is on the rise but demand will likely not grow at a required pace to maintain balance, resulting in oil glut. OPEC forecast demand for its crude oil will decline to 2020. Removal of subsidies and implantation of price controls on petroleum products introduced by some governments in the face of low oil prices will likely restrict demand for oil. Growth in oil demand increased last year as low gasoline prices led American to drive more. Demand growth in 2016 will however not be able to surpass 2015 level.

    Lower oil prices have hindered inflation growth in many countries causing the central banks to keep interest rates at record low levels. Oil slump has hurt the central banks’ objective is to spur demand and in the process raise prices. Low oil prices hurt the energy companies, whose sagging profits have called for measures to slash spending. Energy companies reduced investments for exploration and oil production. Drilling projects which have been scaled back has affected overall activity in the energy sector. They have laid people off as well. This in turn affected overall employment rate. The spending capacity was automatically reduced as people lost jobs and even wages were slashed. Inventories increased as people bought less. Businesses in the process of offloading unsold goods did not expand activity. Thus manufacturing activity suffered.

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