Tag Archives: brent crude

US driving season is failing to rev up the oil price

This week, Mike van Dulken and Augustin Eden of Accendo Markets tell Hot Commodity why the outlook is rather gloomy for the oil price…

Oil’s making the headlines this week – crude stockpiles may be falling but so too are prices. Far from this being a mere case of the market ‘throwing its toys out of the pram’ when the data is not quite as bullish as it would like, it’s rising Gasoline inventories that’ve got people scared. Which brings to our attention the rather important issue of demand. Until recently the buzzword in the oil space has been ‘supply,’ global oversupply to be precise, and not only has this presented a one-sided picture – that big producers are keeping the taps open trying to freeze out smaller competitors with lower prices – it’s failed to account for how much oil is actually being consumed in the form of fuel. It’s left out the consumer!

The crude price rally to June highs came with expectations that Americans would spend the coming months driving around in their big gas guzzling American cars. This phenomenon is so well known it’s been given a name, ‘US Driving Season’, and it should have been viewed with particular gusto this Spring since crude stockpiles have been consistently falling (drawdowns in 10 of the last 11 weeks). The only problem is that gasoline stocks have been rising. Meaning Americans aren’t driving quite so much this Driving Season!

With the rise in US gasoline stocks offsetting the fall in crude – considered the most important market and thus a global bellwether – not much has actually changed and so we’re back to the situation whereby supply is still exceeding demand. This time, however, it’s made worse by a situation of under-demand – the same thing but with a different emphasis. It’s not just supply that’s the problem now. It’s also demand, or a lack thereof.

Demand for oil is of course not confined to those American drivers, it’s arguably driven harder by refiners who, seeing gasoline prices falling and thus their margins squeezed, will surely simply buy less crude oil to refine. The upshot of that is…. rising crude stockpiles. This all as we move out of Driving Season.

With oil market dynamics somewhat like a proverbial bunch-up on the motorway, it looks as if the 2016 oil price rally is now in need of some fresh ideas.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

The oil price follows the market’s heart, not head

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why it’s sentiment, not fundamentals, that will boost the oil price.

Equities remain rather sensitive to commodity prices – understandably, given their links to economic growth sentiment. In the oil space we continue to hear mumblings of meetings to discuss production freezes (Moscow next?), yet the probability of any agreement between Opec and Russia is non-existent as long as Opec’s own members fail to agree – Iran and Iraq are still increasing production. Can members trust each other anymore? Has the oil price decline on Saudi-led stubbornness taken things too far in some cases? Is the cartel no more? US production has fallen to a six-month low, helping prices recover to their best levels in many weeks, yet as we have written before, this just risks the US shale frackers rolling back in to make the most of more economically viable prices. They are the new swing producers.

While this remains a distinct possibility, we can’t fail to note some interesting technicals of late that are at odds with some of the fundamentals. US Crude has broken above $36 which could see it on for a double-bottom pattern completing around $45. A price in the mid-$40s makes sense after comments from some US producers about $40 being the new $70, and a $45 figure being cited as enough to encourage some of the nimble drillers back to their rigs. Yet US stockpiles continue to grow to fresh all-time highs. Will today’s data show yet another increase?

Brent Crude, on the other hand, never tested its $28 lows twice and so a double-bottom can’t be on the cards. While there is interesting resistance at $41.30, there is still potential for an inverted head and shoulders reversal to complete at $48 after the breakout at $36. Importantly, if both patterns achieved their objectives this would put paid to major long-term downtrends, getting prices back above what has been bugbear falling resistance since those long gone $100+ highs of summer 2014. It was also maintain the current $3 spread between the two benchmarks.

A major broker may have announced to the world yesterday that the recent surge in commodity prices has gone too far with fundamentals unchanged, exacerbated by short covering, ETF buying and banks vying to distance themselves from bad sector debts. That call may have resulted in a sell-off yesterday. However, markets have already regained poise. After all, fundamentals are one thing, but sentiment is very much another. And hopes of a more favourable message from central banks over the next week or supportive chat from major oil producing nations could easily serve to boost bullishness for the barrel again.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Sorry investors, the oil glut looks here to stay

FinnCap’s Dougie Youngson tells Hot Commodity why he is sceptical about recent talk of cuts to oil production…

Oil prices ticked up again at the beginning of this week as investors continued to hope that that the current glut of oil production could finally start to fall. Last week Saudi Arabia, Venezuela and Qatar announced they were proposing to freeze production at January’s level. But any deal is dependent on the participation of Iraq and Iran. Both are said to be supportive of the “big freeze”, but have yet to commit to the group. Oil-field-services firm Baker Hughes also said last Friday that the number of rigs drilling for oil in the U.S. fell by 26 last week to 413, down 68% from a peak in October 2014. But in both cases we are looking at freezes on current production levels, not cuts, and these countries will continue to produce above quota.

There is actually a practical reason for not making cuts. Once you shut in a well it can be difficult to bring it back online at the previous levels of performance. Shut in wells rarely return to former production rates, and this is a serious concern given the cuts that are required in order bring production in line with demand. This issue is particularly pronounced in Russia, which can be victim to a more common kind of freeze. Its shut in wells tend to get quickly filled up with water, and come winter this water freezes, which has a devastating effect on both the reservoir and infrastructure.

It’s not just the threat of gammy wells that mean producers are unlikely to shut down production. After all, what incentive does Saudi Arabia really have to reduce production? Why should they help out the rest of the industry? If they can still make a profit at the current oil price then they have little incentive to change. Oil is a finite resource and their oil supplies won’t last forever. So it makes more sense for them to keep production high, so that they can maintain their market share and enhance margins when the oil price does eventually recover.

Ultimately, any resolution on production levels will simply act as a sticking plaster. Key countries may well say they will rein in their overproduction, which is no bad thing. Demand is also forecast to increase by one to two million barrels per day, and this increase could help mop up the overproduction by the end of the year. However, what people say they will do and what will actually happen are two very separate things. The only certainty is that producers will act in their own interests, whatever they may be.

This commentary was provided exclusively for Hot Commodity by FinnCap.

Price of brent crude rises after Iran’s oil minister says he supports production freeze

The price of oil has risen after Iran’s oil minister Bijan Zanganeh has said that he supports other producers’ pledges to freeze production – although he didn’t confirm if Iran would follow suit.

Zanganeh said that today’s meeting with his counterparts from Venezuela, Iraq and Qatar was good and that he supports cooperation between Opec and non-Opec producers, according to reports.

He told the oil ministry news service Shana that he supports anything to stabilise the market and that this is the first step, but more steps need to be taken, reported Reuters.

The talks followed yesterday’s meeting in Doha, where Saudi Arabia, Russia, Qatar and Venezuela all pledged to freeze oil output, if other producers participated.

Getting Iran to agree is the tricky part and Zanganeh, while positive about the talks, did not explicitly say whether he would agree to freeze output. Iran only recently had its Western sanctions lifted so is obviously keen to ramp up output and make up for lost time.

The price of a barrel of brent crude was up more than three per cent this afternoon to around $33.

“Asking Iran to freeze its oil production level is illogical … when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices.” Iran’s OPEC envoy, Mehdi Asali, was quoted as saying by the Shargh daily newspaper before the meeting, according to Reuters.

“How can they expect Iran to cooperate now and pay the price?” he said. “We have repeatedly said that Iran will increase its crude output until reaching the pre-sanctions production level.”

Oil prices have been painfully low for the past 18 months, mainly due to Saudi Arabia’s “lower for longer” strategy to try and drive out higher-cost competition.

But the Opec leader’s plan has not been working, which is why it is now trying other ways to boost prices.

The market so far is unconvinced. With the countries pledging to freeze production at near-record levels and Iran not yet on board, it is simply not enough to end the mammoth supply glut.

For more analysis, check out the piece I wrote yesterday for London newspaper City AM:
Saudi-Russian pledge to freeze oil production may be smoke and mirrors

ANALYSIS ON TODAY’S NEWS TO FOLLOW SHORTLY

The oil price is now hinged on a war of words

In the latest of Accendo Markets‘ regular commentary for Hot Commodity, Mike van Dulken and Augustin Eden give their take on the latest oil price volatility…

Ever since Russia piped up a few weeks back, saying that it was about to sit down with Saudi Arabia to discuss a worldwide five per cent cut in crude production, there have been several instances of other market players trying the same thing, and just a little oil price volatility to boot. Suffice to say, markets quite quickly called this tactic following a swift rebuttal from the leader of the Opec cartel, and perhaps a few more call-outs by some level headed (and perhaps a little cynical) analysts, ourselves included.
 
The latest attempt (by Iran) to buoy the price of oil by talking about production cuts was mostly unsuccessful, although prices did move by about a dollar and, to give credit where credit’s due, held those gains for a few days. So we’re now entering an era where a war of rhetoric is likely the major driver for crude prices, given that the hard fundamentals – a global supply glut and a squabbling group of producer nations – have not changed. We really could be getting to the point whereby the oil price is moving on the breath of whoever happens to mention production cuts on a particular day. Price action is largely dictated by psychology, but when it becomes completely dictated by psychology, there’s a problem.
 
That’s why some big names like the International Energy Agency (IEA) have had to step in to remind us all about the fundamentals. The world is still awash with oil. Such tones, echoed by some of the world’s largest oil traders (who you’d have thought might actually like the price to rise and make them a quick buck or two on their burgeoning stockpiles) yet rebuffed by oil company executives hoping for a return to $100/bbl for so long, are being brought ever closer to the fore in February. The oil execs are now coming round: BP’s Bob Dudley has gone on the wires to tell us that “every oil storage tank will be full by the second half of 2016”. From the CEO of a company that needs oil prices to be higher, it doesn’t get much more bearish than that.
 
Are we finally seeing a sense of realism come back to the oil market after such a tumultuous January? Shale has proven surprisingly resilient to Opec-led tactics of over production and price depression, and it looks as if low interest rates (they’re still low, and going negative) will continue to assist any fracking company to jump into action as soon as the cracks in the crude producing nations’ balance sheets get wider. In a world where carbon emissions dictate the directions of the energy and automobile industries, lower oil prices are here to stay. Sadly for Saudi Arabia, it’s the market that’s king.

This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Do you agree with Mike and Augustin or do you have a different take on the oil market? Email info@hotcommodity.co.uk with your comments.

Libyan oil will fail to deliver despite unity government

Libya nominated a unity government yesterday after a lengthy UN-brokered negotiation, aimed at harmonising the embattled country that is currently being run by two rival governments.

But sadly political stability is still far away for this resource-rich country, which is having to fight the aggressively expansionist militant group Islamic State.

As such, it seems unlikely that the North African country, which has the largest oil reserves in the continent, will be able to return production to its 2011 peak of around 1.6bn barrels a day from its current levels of under 400,000 barrels.

With brent crude dipping to 12-year lows this week and hovering at around $28.30 a barrel yesterday evening, an absence of Libyan output will be of no matter to the market. But it is everything to Libya’s financial stability and its peace.

When I edited a Middle East-focused trade mag, I remember chatting to an insurance company CEO in Dubai shortly after Gaddafi had been toppled in 2011. The CEO, and a number of other UAE delegates, had been invited on a trip to Libya to boost trade. At the time, there seemed everything to hope for – I even wrote a feature along the lines of Libya’s oil reserves being the next big thing. But the awaited period of political stability and harmony failed to arrive, with competing armed forces taking control of oil fields even before IS came on to the scene.

Libya relies on oil for around 90 per cent of its revenue, so an unproductive Libyan oil sector means a financially weak Libya. A power vacuum and a struggling economy are manna to IS, which is destroying Libya’s oil fields, rather than taking them over like it did in Iraq and Syria. Whether this is a plan to weaken the country further in order to take control, or simply stage one of a plan to devalue the oil assets before pouncing on them, is debatable.

Either way, Libya is in dire straights. RBC Capital Markets research earlier this month called the country a “wild card” that could potentially add substantial quantities of oil to an already saturated market this year, but I think the term wild card is far too optimistic in this case. For wild card suggests a possible return to the stability needed for Libya’s oil sector to prosper – which would be incredible in the current climate.

Firstly, the new, nominated government needs to win acceptance – the fact that two out of the nine members of Libya’s Presidential Council have already rejected it shows just how divided the country is.

Secondly, to make progress on energy security in the face of low revenues, a divided government and attacks from a number of rebel groups, not just IS, will be a long and arduous process.

Thirdly, a growing number of oil fields have been destroyed by IS, meaning work would need to be done to return them to an operational standard.

Of course, situations change quickly and perhaps 2017 could present a more promising year for Libya and its oil reserves. But the longer it remains in flux since the demise of its tyrannical ruler, the less likely it seems.

Latest oil price slump shows that black gold has lost its lustre for good

Oil tumbled more than two per cent yesterday, edging perilously close to an 11-year low despite growing fears of World War Three kicking off between Saudi Arabia and Iran.

You’d think that the risk of disrupting supply from two of the world’s largest producers would rattle traders, but no! Late last night you could buy a barrel of brent crude for a little over $36 (£25) – small change compared to the $115 highs of Summer 2014. Prices had trickled down to an 11-year low of $35.98 just before Christmas.

I’ve been bear-ish on oil for quite some time now despite some spikes throughout the year and I still think it could drop to $20 a barrel. But increasingly the market consensus appears to be that oil will rise in the medium term.

The typical view from people I speak to is that Opec (for which read Saudi) will keep production high, which will keep prices low by creating a supply glut. This in turn will cause other producers (for which read the US) to cut their output as they can’t make a profit and eventually this will push prices up as there will be less oil around to meet the demand.

I think this is a far too simplistic a theory.

Firstly, I think the decrease in production, namely from the US, would have to be incredibly dramatic and it would take quite some time to show up due to their mammoth stockpiles of oil. This would be a long term not a medium term effect – and would only work this way if there are no other mitigating factors. I wonder if the hand of government would come into play if the mighty US lost its booming shale industry that was turning it from a net importer to a net exporter of energy?

Secondly, this theory only works if demand stays the same. And here lies the unknown. With growth in China – the world’s largest consumer of commodities – having slipped back into second gear, will there be enough demand to keep oil prices high? The market volatility in China this week shows that no-one really has the faintest idea about what’s going to happen.

Meanwhile in the West, increased energy efficiency measures and investment in renewable power sources mean that oil isn’t the master of the energy market that it once was. There are even predictions that the West’s energy consumption will decrease by the 2030s.

Why does everyone assume that oil prices must, and will, stabilise at a higher price? Surely a lower price could eventually become the new normal and economies would have to adapt or die as a result?

Are you an oil bull or a bear? Email info@hotcommodity.co.uk with your views.

Happy New Year to you all!

Desperately seeking financing: Nigeria in trouble

How do you solve a problem like Nigeria? Long touted as the jewel in Africa’s crown in terms of economic potential, the country’s bad debts and a domestic liquidity crunch are showing no signs of abating as long as the low oil price persists.

Brent crude futures edged down to around $43.63 yesterday evening, which is not a million miles away from August’s six-and-a-half year low of $42.23. I’m pretty bearish on oil and wouldn’t be surprised to see the price slide wayyy down over the coming months – the underlying pressures just aren’t going away.

The Nigerian economy, which is heavily dependent on oil, can’t break even at these prices and its currency has crashed. The central bank is rationing its foreign currency reserves, causing major problems for companies who borrowed in dollars and need to pay off their debts.

Multinational oil companies such as Shell and Chevron had already sold off their assets in Nigeria to local firms, who borrowed money to buy them and are now the ones saddled with this bad debt.

With such limited liquidity in Nigeria, it’s the international market who is providing the refinancing – mainly banks and private equity. And a well-placed source tells me that he expects more London listings for Nigerian companies, who can’t raise money on the teeny Nigerian stock exchange.

Will institutional investors come to rescue Nigeria from its debt debacle? It’s not the safest bet, but I expect that there is money to be made for those willing to take a long (long, long…) view.

Meanwhile Nigeria is facing a major fuel crisis. Despite its plentiful oil reserves, the country imports its petrol as it does not have the capabilities to refine it. Importers are now withholding petrol after an alleged payment dispute with the government, causing lengthy queues of angry motorists at petrol stations.

Nigeria needs to get a grip on its resources and build some refineries. Of course, to do this it needs reliable power generation, another problem the country is yet to address. And is unlikely to do so as long as its liquidity woes continue.