RIYADH, Saudi Arabia, Mar 24, 2014/ Troy Media/ – Softening of crude markets could be just round the corner, courtesy of growing conventional and unconventional output and the stabilization of global consumption growth. The question is not if – but when?
On the global economic horizon, while China has been the constant, indeed sole, star performer over recent years, things seems to be changing. In the first two months of 2014, industrial confidence and output indices, retail sales, fixed asset investment and credit creation were all weaker than anticipated.
Chronic overcapacity and rising debt service problems in key Chinese industries are also becoming apparent. A recent drop in the Chinese currency and the sharp fall in copper and iron ore prices are the latest high-profile manifestations of China’s changing outlook.
Yet, despite all this, a combination of geopolitical events in Syria, Libya and Nigeria have prevented any significant price slide. But in the emerging scenario, how long the markets can stand firm – above $100 – remains a big if, and a source of speculation too.
In the short term too, the overall picture is not robust. Seasonal maintenance of refineries is crimping U.S. demand and a stronger dollar is making the commodity more expensive. The U.S. dollar has been strengthening since new Fed governor Janet Yellen suggested interest rate hikes could come relatively quickly once the Fed ends the extraordinary stimulus policy.
Eminent industry pundit Philip Verleger Jr, the former David E. Mitchell/EnCana professor at the University of Calgary and a former director of the Office of Energy Policy at the U.S. Treasury in the Carter administration and now head of PKVerleger LLC, is of the opinion that the world oil price could drop $10 to $12 per barrel.
His view is based on the decision of the Obama administration to release crude from the Strategic Petroleum Reserve (SPR), which could have a significant impact on the markets. The SPR now holds 694 million barrels of crude and, despite the International Energy Agency requirement to hold reserves equal to 90 days of imports, the U.S. could easily sell 500,000 to 750,000 barrels per day for up to two years without breaching this obligation according to Verleger. ‘If the U.S. did this and all else remained equal, the world oil price would drop $10-$12 per barrel,’ he suggests.
A weakening of the markets could also turn out to be a strategic objective of the Obama administration, as a slide of $10 to $12 could inflict substantial pain on the Kremlin, cutting its export income by around $40 billion, Verleger asserts. Not only could this lead to Russia’s GDP falling as much as 4 per cent, it could also exacerbate the ruble’s decline and further increase the country’s internal economic difficulties.
Brian Weepie, a researcher at S&A Resource report, is also of the view that crude prices are in for a fall in the near term. And he has a story to tell.
Last summer, crude oil enjoyed a large short-term rally. Prices moved from $94 per barrel in June to $108 per barrel in July. But then prices fell from $108 per barrel in August to $91 per barrel in January – more than a 15 per cent decline in just over five months.
Conditions today are similar to last summer, Weepie asserts. Weepie used an indicator called “Commitment of Traders (COT) to reach his conclusion. COT measures the number of participants on each side (long or short) of a trading position and shows the positions of oil producers, refiners, and traders (speculators). When a huge number of market participants take one side of a trade, the trade often moves in the opposite direction, Weepie said – as happened last summer. And when the price drops, traders sell. The selling forces the price even lower. “That’s what we saw in August (2013) . . . And it’s happening today,” Weepie points out.
Since the beginning of this year, crude oil prices have rallied from $91 per barrel up to $105 per barrel – a 15 per cent increase. But like last August, this rally too has drawn in a massive amount of speculative traders – the highest in several years. And just like in August of last year, the market today seems ready to punish the speculators. Hence, the price will likely continue to fall as once-bullish speculators sell their positions, according to Weepie.
Fundamentals continue to point to a softening market – in the near to mid-term.
Rashid is an energy analyst and a widely published expert on global energy affairs. He appears regularly on BBC and other news media. He operates an energy consultancy, Husain’s Associates, from Toronto, dividing his time between Canada and the Middle East. For almost 25 years, he has served as Vice President of a leading Saudi trading and consulting house.
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