Tag Archives: oil price volatility

shutterstock_140842708

No cheers from Algiers: oil price set for more volatility

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why Algiers was fruitless and what we can expect next from the oil market…

It seems, as expected, nothing will come from an over-hyped Opec-led oil production freeze meeting in Algiers. Except for providing lots of quotes to fill the airwaves and fuelling oil price volatility, that most would have happily forgone.

I’m not sure how markets developed any optimism whatsoever that an agreement would be made, given the poor track record at meetings so far this year. We now likely have to wait for the official Opec meeting in Vienna at the end of November for something more concrete in terms of concerted efforts to stabilise the global oil market, buoying prices in the face of a global supply glut. However, having everybody (Opec and Russia) in the same room and on the same page is a good start. As is some welcome, even surprise flexibility from the Saudis.

The build-up to today’s finale has been as fun as ever, with plenty of inflammatory and contradictory comment almost making a mockery of the event and the major parties involved. Deals and solutions were allegedly plentiful only to result in little. Iran is the linchpin – stubborn as ever. But rightfully so, in our view, preferring to ramp up production from 3.6m/bpd to its goal of 4m. A distinct lack of urgency on its part to find compromise with struggling Opec peers suggests it is nowhere near as desperate to help stabilise prices. It clearly sees more upside in selling 10 per cent additional production at $46-50/barrel than selling its current output at $50+. How so? After years of sanctions, being able to sell any oil at all is a bonus. And if peers do capitulate and cut production, it will only help Iran in its quest to retake market share. Where’s its incentive to play ball before it gets back to pumping at full pelt? Let the others move first.

This makes sense, with Iran’s public finances far less exposed to the oil industry than Opec mouthpiece Saudi Arabia. The latter was, to nobody’s surprise, the most frustratingly but unproductively vocal this week. It helped the oil price rally with talk of a deal offered to Iran (“if you freeze, we’ll cut”) only for the gains to be swiftly eroded by Iran’s flat refusal. This suggests, even confirms, that the Saudis are in a much more perilous position financially, needing a production freeze/cut deal soon. It’s no surprise, with a skyrocketing budget deficit of $100bn, that it’s mulling a Saudi Aramco IPO and selling government debt to ease the burden of lower oil prices on public spending plans inked when oil was closer to $100/barrel. It is set to meet Russia again next month; prepare for plenty more market-moving rhetoric.

This week’s meeting may not have delivered that much, but will hopefully prove a stepping stone on the way to more stable oil prices. The stream of disagreement between all parties involve, however, remains a wide one to cross. What’s the chance that November’s Opec meeting is yet another damp squib, forcing us to look to 2017 and contemplate déjà vu all over again?

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

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.

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.