Tag Archives: oil

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 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 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

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.

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!

Other people’s money: why the Bank of England needs to raise rates

Legal and General Investment Management’s chief economist has urged the Bank of England to start raising rates, amid fears of an impending consumer debt crisis.

“So many UK customers are on variable rate mortgages – more than in the US,” said Tim Drayson. “I think it’s important to get the process of rate rises underway and normalise it, as the longer you leave it, people will take on more debt…then you’ve got potential for a harder landing.”

“Unsecured credit is starting to get frothy again,” he warned. “There is scope to use macroprudential tools…[but] interest rates is one way of doing this and getting in to all the cracks [of the financial system].”

The Bank of England base rate has remained at 0.5 per cent for more than six years. Doves argue that it should stay this way due to low inflation figures, while hawks say that wage growth and excessive lending need to be addressed.

Drayson said that LGIM is “more hawkish than the market”, although he commented that the UK “is a bit of a wildcard” as its growth depends greatly on whether commodity prices recover or not.

Brent crude is currently lingering at around $43 a barrel, with the $115 of summer 2014 but a distant dream. LGIM attributes the decline to an increase in supply, rather than a slowdown in industrial production in China and the eurozone.

Allianz GI’s UK equities fund manager on the merits of oil and why defensive stocks are losing their edge

In the first of Hot Commodity’s investor series, I chat to Simon Gergel, chief investment officer, UK equities at Allianz Global Investors, about which stocks are set to become a hot commodity next year and which ones will be yesterday’s news…

Simon says: oil majors

The fund manager is pretty bullish on large oil companies, which suggests that the sector is suitably distressed enough to become attractive. Simon thinks the oil giants are in a more promising shape than oil itself, as the depressed pricing environment has made the likes of BP and Shell cut costs and improve their business models. Although he is expecting the price of oil to rise in the medium term.

So will Allianz GI be ramping up its allocation to oil-focused equities? Simon did not rule this out. “We’ve already got quite a big position on oil companies and we have increased our position before,” he says.

Simon says: copper

Surprisingly commodities are not the pariah one might expect in the current pricing climate, dragged down by the growth slowdown in China. Or should I say SOME commodities. “It’s dangerous to generalise”, says Simon.

“A lot of production has been taken out of copper this year. It is much tougher to increase output for copper than for some other metals such as iron ore, as it uses deeper and more difficult technologies”, he says, the implication being that tightening supply will push up the price. “It is also less dependent on Chinese infrastructure. We’ve bought [FTSE 100-quoted Chilean copper miner] Antofagasta in the last six to nine months.”

Simon says: leisure

Other sectors on the Christmas wish-list are leisure stocks, such as gambling firms William Hill and Ladbrokes, cruise company Carnival, pub chain Greene King and satellite firm Inmarsat – “I see growth in marine and aviation communications”.

I asked Simon what he thought about fund guru Neil Woodford’s bullish stance on tobacco and healthcare.

“The problem with tobacco is that the valuations are so high now,” he says. “The product is on the decline in most parts of the world.”

Simon likes GlaxoSmithKline – “the Novartis deal transformed the business” – but that’s the only pharmaceuticals stock in his portfolio.

So what is leaving him cold?

“Defensive stocks/bond proxies have done well at a time of low rates,” he said. (Bond proxies are companies with healthy dividend yields and low volatility, that are seen as a safe-ish bet in poor market conditions).

But with rate rises imminent in the US and the UK, which will increase bond yields, Simon expects defensive stocks, including the likes of Unilever and Reckitt Benckiser, to become less attractive.

Simon expects an EU referendum in late spring/early summer. “Uncertainty around a Brexit could lead people to focus on global companies, which are less dependent on the UK economy,” he says.