Tag Archives: oil price rout

Oil price: don’t expect much from Algiers

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why the oil majors’ meeting in Algiers is unlikely to bring resolution to the production impasse…

The price of a barrel of brent crude oil sits at the mid-point of a tight $45.5-$50/barrel September range, one which has already closed in from a wider $42-$53 from April through to mid-August. Investors are pausing for thought, price activity narrowing as they await the outcome of an informal Opec-led meeting on the sidelines of the International Energy Forum in Algiers, Algeria on 26-28 September. It is here that we hope to finally hear some real progress regarding an agreement between major oil-producing nations to curb excessive output, stabilise the market and solve the global supply glut. This would likely help the oil price rally quite significantly.

We have been here before though, if you cast your mind back to April in Doha. The risk is we simply end up with yet another unanimous agreement that a freeze is necessary but which nobody is willing to implement, because they don’t trust fellow attendees to honour the promise and/or because they can’t afford to cap production themselves. With oil prices down at $45 versus the $100+ they traded at when times were good, most oil-reliant nations are hurting badly – Opec mouthpiece Saudi Arabia included. The latter has resorted to selling bonds and is prepping for a future IPO of state oil company Saudi Aramco. A painful adjustment is becoming increasingly necessary within the group to rebalance previously oil-funded public finances with much lower oil receipts.

Conflicting comments from oil ministers as the meeting approaches does little to inspire confidence. The Saudis, Iranians and Russians are keeping us entertained. Buy the build-up, sell the meeting has proved the correct strategy so far this year.

While a failed meeting risks sending oil prices lower, a host of drivers are, nonetheless, keeping prices from falling markedly: the buck-denominated commodity is buoyed by expectations of a delay to US Fed rate rises, something we don’t see happening until March next year at the earliest; the energy commodity remains in recovery mode with technicals still showing supportive rising lows around $45 since the very depressed 12/13 year lows (<$28) in January; global growth has not collapsed, even if remains sluggish to say the very least; there is no sign yet of a Chinese hard landing (big oil consumer). Also, monetary stimulus/accommodating policy remains in abundance from all the major central banks; geopolitical instability in the Middle East remains ever-present; and US oil inventories continue to oscillate around breakeven, never straying too far (last week’s aberration drawdown was due to a storm). As with the Fed and its rate rises, I struggle to see how we can get a unanimous agreement to freeze production or respect caveats this month, which means prices are highly likely to correct. But I also expect the build-up to generate much excitement and a price rally beforehand, meaning the ensuing correction merely retraces the up-move and doesn’t do too much damage. After all it’s in every participants' interest to talk up the price, but in nobody’s interest to see it break the 2016 recovery uptrend. Expect lots of chat and media comment for something that will likely amount to nothing more than another round of tea and biscuits and agreeing to disagree by the great and good (and bad) of the oil world. This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

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.

Dong Energy’s IPO shows why offshore wind is more than hot air

Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.

The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.

I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).

I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?

This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.

Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.

Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.

In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.

But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.

Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.

I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.

But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…

The oil price recovery is unlikely to last

This week, Mike van Dulken from Accendo Markets tells Hot Commodity why hopes of a continued oil price recovery are premature…

There has been much talk about the remarkable recovery in the price of oil to $41/barrel and whether it is sustainable. After 50 per cent gains since January’s 13-year lows are we set to push on or retrace? Debate continues as to whether Opec and Russia can cobble together some sort of production freeze agreement. Not in our opinion. Not while Iran and Iraq are in full recovery mode. Can anyone trust anyone, given the hole they have dug themselves in the fight with US newcomers for market share?

This keeps the global supply glut overhang very much in play and risks worsening as prices approach $45 where some nimble US shale frackers – now the oil market’s swing producers – have suggested they would consider returning to idle rigs to pump at the more economically viable price. Which would of course add to the supply glut and thus give us a $45 ceiling to accompany the recent $28 floor.

However, there has been little focus on the narrowing of the spread between the two crude oil benchmarks over the last few weeks to the point they are now just a few cents apart. With US Crude +52 per cent versus Brent Crude +48 per cent we could assume that US Crude has overshot and may be due a drop back below $40. For a long time, US Crude traded at a significant discount to Brent, driven by a sharp rise in US shale production over the last half decade and Brent incorporating more transport costs. However, there are reasons why the spread should have evaporated of late, even testing positive in December. The US has lifted its export ban. North Sea production has actually picked in the face of declining US shale production. Bearish market bets on oil have been unwinding sharply, most notably on the widely used US Crude benchmark.

So are those bullish reversal patterns set to complete at $45/48 as we asked a fortnight ago? Or is $42 the best we are going to see in terms of challenging the long-term downtrend? Is the short squeeze complete? A supply glut, rising US stocks and Opec disagreement are simple enough drivers to appreciate, with plenty of data points and comments to media fuelling volatility. However, don’t forget the currency element with oil – like most commodities – denominated in USD. The USD is already off its 3.5-month dovish Fed-inspired lows of last week. This is thanks to a handful of US monetary policy makers very publicly expressing views which are rather at odds with the dovish stance most recently offered by Fed Chair Yellen. Any more of this and the resulting USD strength could easily serve to push oil back or at the very least hinder further advances.

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.

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.

Accendo Markets: will the Fed release the doves?

In the first of Accendo Markets‘ regular market commentary for Hot Commodity, Augustin Eden and Mike van Dulken discuss whether the Fed is having cold feet and why gold is good…

This week’s main event is sure to be this evening’s US Federal Reserve policy statement and whether it dares issue some form of dovish mea culpa regarding its December decision to hike, especially given the market turmoil that has greeted us in 2016. While credibility was on the line after such a protracted warm-up, it probably felt obliged to hike rates on US data improvement.

However, it at least has the option to tone down its opening message of 2016 (with no press conference or Q&A) about how many more hikes we might expect this year. From a lofty three, markets are now pricing in one at best. What’s clear is that while the US may have been ready, the global markets were not.

Will the Fed’s focus lie with the US economy’s continued recovery progress or recent financial market volatility? It should be the former, but the latter can’t be ignored. Arguments may dwell on how it was right to move then, but hold now.

Financial markets have neither enjoyed the second half of 2015, nor the tricky start to 2016, but the same needn’t necessarily be said about all asset classes. While equities are hindered by persistent commodity price weakness after an 18-month rout, and a slowing and troubled China, many ask whether the worst is priced in and the doom and gloom overbaked.

So far so gold…

What’s this got to do with the price of gold? Well, it’s having a cracking start to the year, bouncing from 5/6yr lows on talk of output having peaked. Also, as a safe-haven, it needn’t worry about US dollar strength. If people are that fearful (unless they’re Warren Buffett) they’ll probably be yellow-metal bound. The zero-interest bearing asset has seen rising demand from market volatility and technical drivers as well as hopes the Fed will go all dovish on us after December’s ‘mistake’ to raise rates from record lows.

If this does happen, we could well see a pullback in recent USD strength. It’s almost as if the dollar has been simply resting near its 2015 all-time highs, waiting for its next pointer, which could well be revised US monetary policy guidance for 2016. There’ll arguably be a knock-on for the entire commodities sector from that. Even oil could gush a little higher from the FX benefit, despite a more meaningful recovery surely needing moves to cut output and reverse its own supply glut.

This commentary was provided exclusively for Hot Commodity by Mike and Augustin at Accendo Markets – https://www.accendomarkets.com.

Do you agree with Mike and Augustin or do you have a different take on the Fed’s next move? Email info@hotcommodity.co.uk with your comments.

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!