NYC-based PIRA Energy Group believes that oil sands production will remain resilient despite low prices. In the U.S., a large commercial stock build matched last year. In Japan, crude runs and imports rose and stocks built. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Large U.S. Commercial Stock Build Matches Last Year
This past week commercial oil inventories increased 10.0 million barrels, leaving the stock surplus to last year at 163 million barrels. Most of the build was in the key refined light products and these builds were even stronger than last year’s. Hence, the stock surplus for distillate widened and the stock deficit for gasoline virtually disappeared.
Demand Improves but Supplies Remain Overbearing
Going into a New Year, fear remains largely focused on additional price weakness, which is also reflected in the PIRA price forecast. Demand is definitely stronger, but still not strong enough to alleviate the pressure building behind burgeoning global gas supplies. The supply pressure is much more apparent in Asia spot prices, where LNG supplies are building and demand remains weak, but it will be coming to Europe in the weeks and months ahead.
Energy Markets Melt Down
The German and French year ahead contracts have plummeted to an all-time low, mirroring a large downward move in the energy pricing complex. While this move is reminiscent of the collapses seen in January 2009, the current market dynamics appear so far to be very different from the great recession of 2008-9, as the current price plunge appears to be driven by a major mismatch in oil supply/demand. Collapsing oil prices have ramifications all over the energy space, but they are also spooking the financial markets, as a financial upheaval is a possibility either in China or in other emerging markets. The trends in real-time electricity demand are an important signpost in the current market turmoil. While data is generally mixed across markets, demand is, so far, not falling as severely as it did back in 2008/2009. If the macroeconomic framework holds up, as it appears, then we should continue to expect relatively steady margins for power generators. The spark spreads could potentially benefit, considering that global oil and LNG balances are now extremely long. However, this length in the fuel markets implies that German power may nevertheless touch new lows.
Bearish Wave Pushes Coal Prices Even Lower
Notable declines in most equity and commodity markets caused coal prices to also move south last week. 1Q16 API#2 (Northwest Europe) prices lost more than $2.00/mt, and pushed below the $45/mt to finish the week at $43.85/mt. Both prompt FOB Newcastle (Australia) and API#4 (South Africa) prices are now below $50.00/mt, and the backwardation in these markets have Cal-17 prices at or below $40/mt. There is not much by way of support for pricing that would prevent further deterioration over the next 90 days.
California Carbon: Gas/Diesel Demand Up, Crude Production Emissions Down
CP1 reconciliation indicates a large allowance surplus with another expected for 2015. For 2016, with weak oil prices, potential lower emissions from shut-in of high-cost oil wells will be more than offset by stronger gasoline, diesel demand. El Nino rain will help CA hydro, though NW hydro may be adversely impacted. Pricing dynamics in early 2016 contrast to one year ago, when hedging from broad scope entities drove prices. Interest in futures will provide an indication of the likelihood of fully-subscribed V-19 auctions.
NGL Prices Dragged Lower by Weak Crude
LPG prices plunged with crude oil with Mt Belvieu propane losing 12% week-on-week. Butane and natural gasoline fared worse at the market center, despite motor gasoline’s slight outperformance on the week. February butane futures at the Texas market center fell 15% to 42.8¢/gal while C5s weakened to 67¢.
U.S. Ethanol Prices and Margins Decrease
U.S. ethanol prices started the year tumbling to the weakest level in over a decade. Manufacturing margins also declined.
Corn Gathers Interest
Between the Commitment of Traders report issued Friday and the market trading above its first hurdle of $3.65 overnight, corn gets our interest as a holiday-shortened trading week begins.
Implementation Day for the Iran Nuclear Deal: What it Really Means for Sanctions
The landmark nuclear deal between Iran and the P5+1 was officially implemented. With the IAEA verification that Iran has met its nuclear obligations, EU and U.S. nuclear-related sanctions are lifted. We summarize the major sanctions that will remain in place as the nuclear deal runs its course, and those that are now lifted.
Global Equities Again Broadly Lower
Global equity markets extended their losses in the New Year. All of our tracking indices moved lower, other than the domestic utility index, which moved higher by 0.8%. Banking, housing, and materials were again the worst performers. Internationally, all the indices lost 2.6-5.3% for the week. Even the strongest performer, Europe, still only performed in line with the U.S. S&P 500 tracking index, down 2.6%.
Japanese Runs and Imports Rose and Crude Stocks Built
Crude runs continued to rise and imports picked up sufficiently to build stocks. Except for kerosene, finished product stocks also built. Gasoil demand rebounded, but balances still produced a stock build. Gasoline demand eased despite a holiday. Refining margins remain very strong with higher gasoline, naphtha, and fuel oil cracks offsetting softer middle distillate cracks.
Tighter January Balances But Still Bearish February Risks
Thursday’s unexpectedly modest 168 BCF reported stock draw further tempered the upward HH price momentum, which already had been arrested earlier this week. Last week’s Gas Flash: Part II (1/8) discussed how colder weather and weaker production had sparked the former HH rally. While January gas balances now appear slightly less supportive, a more resilient backdrop remains, notwithstanding the latest weekly storage report.
Eastern Grid/ERCOT Market Forecast
December 2015 was the warmest and wettest December in the continental U.S. in the 121 year period of record. Eastern Interconnect (U.S.) loads fell by 5.8% (~19 aGW) from the prior year. On-peak energy prices declined in almost every market in December with the exceptions being NY-J, NY-G and the MN hub. Despite the weak prices, implied gas heat rates remained firm with CCGT units in the money everywhere except Ontario. This allowed the power market to absorb incremental volumes of gas that were not required by space heating customers.
Arch Coal Bankruptcy and Market Implications
To no great surprise, Arch Coal (ACI) filed for Chapter 11 bankruptcy in order to facilitate a restructuring of its financial debt load. ACI has entered into a restructuring support agreement with a group of lenders that currently hold more than 50% of the company’s first lien debt. While the typical assumption of a corporate bankruptcy in the commodity sector might seem to be bullish on first glance, this is not necessarily the case in the short-run in a cost-competitive region such as the PRB, and ACI may look to gain market share due to the cost relief. However, it may give ACI some flexibility to temporarily idle Coal Creek, the type of action PIRA believes is necessary (by ACI or another PRB producer) to balance supply and demand.
European Carbon Pushed Down As Gas Replaces Coal
The recent EUA price drop has brought into greater focus many of the existing downside risks: greater supply, weakening demand, and few new policy developments. Low gas prices raise the prospect of increased coal to gas fuel switching and greater uncertainty regarding forward EUA demand – in a market with a shorter appetite for hedging. However, EUA prices may be weather-supported for the remainder of January, following a record-warm December.
Significant Build in Financial Stresses
Financial stresses are building while markets broadly deteriorate. In addition to a decline in equities, the other key indicators such as VIX, high yield debt (HYG) and emerging market debt (EMB) also performed poorly on the week. Total commodities continue to decline. Energy, palladium, aluminum and copper all extended their losses. The U.S. dollar continues to generally strengthen.
Ethanol Stocks Built to the Highest Level in Over 10-months
U.S. ethanol production advanced to 1,003 MB/D the week ending January 8, slightly less than the record high 1,008 MB/D set seven weeks earlier. The hefty output led to an inventory build of 246 thousand barrels to 21.3 million barrels, the highest level in over 10 months.
Time to Breathe
The “final” crop production report of the year gives the market some time to digest and breathe after a tumultuous end to the year for commodities in general. Relative performance for ags, especially in soybeans, has been very impressive given all the commodity and equity noise that surround these markets on a daily basis.
Iran Nuclear Sanctions Relief Imminent
PIRA sees Iranian nuclear sanction relief as imminent, in line with recent headlines that state the IAEA will confirm Iranian compliance with the P5+1 nuclear deal as early as Friday or early next week. We expect Iranian crude production will increase by 500 MB/D rather quickly.
Oil Sands Production to Remain Resilient Despite Low Prices
PIRA expects there to be no material shut-ins in Canadian oil sands despite oil prices below cash operating cost. High fixed cost, shut down/restart costs, and risk of reservoir damage make the potential for shut-ins unlikely. Rather, operators are likely to increase utilization rates to further drive down per barrel cost. PIRA expects oil sands production to grow 250 MB/D in 2016 in spite of low prices.
U.S. Set to Upend Atlantic Basic LNG Markets
The somnambulant nature of the Atlantic Basin LNG market is all about to change with a first cargo from the first of five 6.2-bcm/yr. trains at the Sabine Pass project. In contrast with the ongoing surge in Asian LNG volumes over the past 18 months, which so far have added some 15-bcm of new supplies since this time in 2014, Atlantic Basin LNG volumes have been in a years-long state of atrophy, with new liquefaction trains (Algeria, Angola) adding nothing to incremental regional supply; in the extreme case of Egypt, which added three “new” trains in 2005, the market had to quickly react to the sudden loss of 17-bcm of volumes over the course of seven months in 2013-14.
Some Latin American Refineries Might Benefit from U.S. Crude Oil
With the lifting of the U.S. crude export ban, Latin America would seem to be a logical destination for U.S. light sweet crude. However, besides Mexico, there are not many suitable refining candidates because only a few refineries currently process light sweet crude. Outside of Mexico, PIRA estimates that maximum penetration of U.S. crude exports into Latin America might be 50-75 MB/D. Mexico could take an additional 75-100 MB/D of light U.S. crude freeing up Mexican heavy crude for export. Beyond these volumes, European refiners are a larger potential market for U.S. crude as they already import substantial volumes of competing West African grades.
WA State Regs Propose Creation of Another Carbon Market
WA released its proposed Clean Air Rule, capping GHG emissions. Compliance will take place over 3-year compliance periods, starting in 2017-19 relying on domestic reductions, RGGI allowances, CCAs, offsets as well as RECs from the Pacific Northwest. This smaller market would draw on lowest-cost supply first - with more limited impacts on the allowance markets. Lower value supply could be some WA-specific reductions, RECs and offset types not eligible in the CA carbon market.
Asian Demand Update: Growth Slowing, but Still Robust
PIRA's latest update of Asian product demand shows continued slowing. PIRA's December update had shown growth of 1.1 MMB/D, which has now slowed to 0.74 MMB/D, with the four major products showing growth of about 0.5 MMB/D. Accounting for the slower growth was China, throttling back from 513 MB/D to 255 MB/D, Japan slowing from 29 MB/D to -98 MB/D, and India easing from growth of 444 MB/D to 396 MB/D. Looking at individual products, the overwhelming change in Asian demand growth has been in middle distillates, both gasoil and jet-kero.
Algerians Raise Gas Prices to Counter Effect of Currency Falls
CREG, the Algerian energy regulator, has increased electricity and gas tariffs for high-voltage electricity and high pressure gas (industry) by 20% and 35% respectively. Retro-active from 1 January 2016, increases in electricity prices cover nearly 76% of consumers while the gas price increase affect 57% of consumers, according to data released by the CREG. The 35% rise reverses prices in USD to Aug 2014 when the Algerian Dinar was 35% stronger than it is currently.
Latest Economic Data Have Downbeat Tone, but There Are No Imminent Signs of Danger
An onslaught of financial risk appetite continued for the second consecutive week, as major equity indices registered further declines. Market conditions have reflected broad-based nervousness about fragilities in the macro backdrop. Key economic data releases have been resilient recently, however, and there are no indications that global growth has weakened notably.
Potential Entities Covered Under WA Carbon Policy
This file offers a list of entities proposed to be covered under Washington State’s Clean Air Rule, designed to cap GHG emissions from covered sources. The list included 2014 CO2 emissions from stationary sources in WA as reported to EPA along with a designation of when facilities will be covered under the Clean Air Rule. This data is combined with estimates for emissions from petroleum products produced at WA refineries, and emissions from fuel importers to provide an overall size of the program.
January Weather: The U.S. Warm; Europe and Japan Near Normal
At midmonth, January looks to be warmer than the 10-year normal by 2% for the three major OECD markets with oil-heat demand weaker than normal by 158MB/D. The markets are roughly 7% warmer on a 30-year-normal basis.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Saudi Arabia’s reluctance to cut production to maintain its share of the global crude market has paid off. By not “blinking first”, the Kingdom has succeeded in driving rigs out of the US shale market with current rotary rig counts down 65% from 2014 highs in September. This has led to significant decreases in production in the Bakken (-10%) and Eagle Ford (-20%) shale plays over the same period. The situation has been compounded by the retraction of Zero Interest Rate Policy (ZIRP) which is expected to limit further investment into small cap shale. This has caused many analysts (FT, CNBC, etc.) to sound a death knell for the once heralded tight oil industry, where up to half of US shale players could go bankrupt in 2016.
However, the strategy put forth by Saudi Arabia has come at a cost. Despite a massive $670bn sovereign wealth fund, the country is slipping into the red. With the government budget based on $106 oil, falling revenue from oil exports coupled with high spending on subsidies and support to foreign allies has led to a national budget deficit of 22% GDP in 2015. According to the IMF, the country may become bankrupt in five years if its expenditure patterns remain unchanged. With oil price expected to remain suppressed until 2017/18, the Kingdom needs to assess all of its options.
In addition to spending cuts, Deputy Crown Prince Mohammed bin Salman has recently spoken of the potential IPO of Saudi Aramco, as a part of the wider series of economic reforms. If successful, such a move would dwarf the other “mega-deals” of the current low oil price environment (e.g. HAL & BHI or Shell & BG). Estimated value of Aramco could reach up to $10 trillion based on its proven reserve at $40 oil price, which is about 12 times that of ExxonMobil ($357bn), Chevron ($197bn), Shell ($192bn) and Total ($118bn) combined.
Arguably, the timing could not possibly be worse for a listing of an E&P company, valuations are at a cyclical trough as a function of low oil prices and most major E&P firms are trading at prices not seen since the global crash in late 2008. It is clear, however, that Saudi Arabia is facing huge budget deficits and desperate times call for desperate measures.
NYC-based PIRA Energy Group reported that the price of WTI dropped in December to the lowest monthly average since 2004. In the U.S., a large holiday week U.S. commercial stock build mirrors last year. In Japan, crude runs are at a new post-turnaround high while demands are impacted by the holiday. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
North American Midcontinent Oil Forecast
The price of WTI dropped $5.55/Bbl in December, averaging $37.25 — the lowest monthly average since 2004. Crude prices were continuing to drop in early January, in anticipation of more stock builds in the first quarter. Crude stocks rose in Cushing and in Western Canada, but generally fell in other regions — particularly in Texas, where ad valorem tax laws encourage minimizing year-end inventories.
Cold Spell Provokes Stronger Demand, Freezes Production
Thursday’s unexpectedly strong 117 BCF reported storage draw gave extra impetus to the already in place bullish price momentum underpinned by two important fundamental shifts since late December — colder weather and structurally weaker production relative to previous estimates. In sum, these developments provide justification for the dramatic upswing in Henry Hub (HH) cash prices after declining to a low of $1.54 over the extended Christmas holiday, as well as the former NYMEX weakness.
Spanish Flows Swing, Coal Dispatching Set to Decline in 2016
The Spanish market has seen increased price volatility so far this year, with lower day-ahead prices resulting in larger flows toward France. Spain has exported an average of over 400 MWs to France so far in 2016, which compares to imports averaging 2.2 GWs during December 2015. The outcome over the past few days has been led by exceptionally strong wind output (11.6 GWs in January to date) and extremely warmer-than-normal weather, as Spanish demand plummeted by over 6% year-on-year. Higher Spanish exports to France are contributing to undermine French prices, also lowering French imports from Germany.
Coal Fades Again; India Not Providing Uplift
The coal market experienced a modest rally midweek despite the notable decline in oil prices and the major selloff in Chinese equities, perhaps due to the wet weather in Australia and as market participants returned to activity in the New Year. However, the noted factors and continued unsupportive fundamentals were too much of a bearish influence on pricing for the market to end in positive territory for the most part last week. Fueled by weaker dry bulk freight rates, prompt pricing for API#4 (South Africa) and FOB Newcastle (Australia) moved up slightly W/W while API#2 (Northwest Europe) declined. Beyond 1Q16, all three forward curves declined, particularly the long-dated deferred prices, exacerbating the backwardation in the market.
Freight Market Outlook
OPEC continues to keep the taps open to force higher cost production from the market and there is no indication of any change in policy. This has helped the tanker sector in a number of ways. From August 2014, when the Saudis first indicated their intent to defend market share, bunker prices have fallen by 70% to the lowest level in more than 12 years, adding $30,000/day to vessel earnings for a typical VLCC. Higher OPEC production and expanding waterborne trade have added substantially to vessel demand, but a bloated supply chain has also contributed immensely. High inventories have caused excess port time and discharge delays, especially in China. While long-term floating storage is still not attractive, unintended floating storage is widespread as charterers knowing that discharge delays are inevitable on arrival are slowing vessels down on their laden legs, reducing fleet efficiency.
LPG Tanker Rates Swoon on Weaker Shipping Fundamentals
Spot VLGC freight rates have plunged to the lowest level since early 2014. Decreasing U.S. LPG export growth, a rapidly growing tanker fleet, and the fast approaching opening of the expanded Panama Canal will continue to plague rates throughout 2016. Rates fell to $52/MT on the benchmark Ras Tanura – Chiba, Japan route, an 18% decrease from the week earlier and a remarkable 62% lower than last year’s July high.
U.S. Ethanol Manufacturing Margins Rise
Most U.S. ethanol prices were steady in light trading during the final week of 2015. After declining for four straight weeks, manufacturing margins improved as corn costs moved lower.
It’s Go Time
Tuesday’s WASDE and QSR are two of the most critical reports of the year and will set the tone for 2016. While PIRA believes that next week’s reports will be bearish, we are also extremely cognizant of the short Non-Commercial positions going into the reports.
Global Equities Begin the Year Broadly Lower
Global equity markets began the year broadly lower for all of our tracking indices. In the U.S. the utility tracking index, largely a defensive play, was the best performer, down 0.8%. Banking, housing, and materials were almost 10% lower. Internationally, Japan faired the best but still declined about 5%. China was down over 10%.
Libya: ISIS Attacks Highlight Ongoing Risk; Expect to See More
ISIS militants launched a two-pronged attack on Libya’s largest oil export facilities early last week. Suicide bombers struck Es Sider (export capacity 340 MB/D), and an assault at Ras Lanuf (220 MB/D) left an oil storage tank holding 400,000 barrels ablaze. A storage tank at Es Sider was also hit. Neither attack will have an immediate impact on Libyan oil supply, as the terminals have been shut for over a year. But the development highlights the ongoing risk of a growing ISIS presence in Libya. We expect to see more attacks in the near future, which could do further damage to oil infrastructure, disrupt already-minimal oil supplies, or prevent any improvement in output. It may also exacerbate the security vacuum in Libya, igniting broader fighting between the two rival governments in the country. The lack of territorial gains by ISIS in other parts of the world (Iraq, Syria) may encourage more ISIS activity in Libya.
Large Holiday Week U.S. Commercial Stock Build Mirrors Last Year
Total commercial stocks built 7.3 million barrels this week, narrowing the surplus to 163.5 million barrels, or 14.2%. Crude stocks drew 5.1 million barrels this week, versus 3.1 million barrels last year; the four major refined products built 15.9 million barrels this year, versus a whopping 18.6 million barrels last year; and all other product stocks drew 3.5 million barrels versus drawing 5.7 million barrels last year. At 1,312.6 million barrels, total commercial stocks set a new weekly record. We think uncertainty in holiday week data (this year and last), along with a loss in trucking activity, and possibly minimal drawdowns from flooded PADD II terminals, contributed to this year’s large refined product stock build. Last year, the largest product build was in distillate, while this year, it was in gasoline, impacting demand growth rates.
Relocated Louisiana Methanol Plant Now Up and Running
The Methanex Corporation announced that on December 27, 2015, the company successfully produced the first methanol from its newly completed one million ton Geismar 2 methanol plant in Geismar, Louisiana. The plant was relocated from the company's production site in Punta Arenas, Chile. The total combined cost for the completion of the two Geismar plants is approximately $1.4 billion.
U.S. Coal Market Forecast
Record warmth in December drove natural gas pricing and coal burns lower, driving coal stocks to a record level for the month of December. With gas forwards in the $2.30/MMBtu range and coal stocks at limit levels, we foresee deep cuts in coal production. We have cut our outlook by 60 MMst since last month. This will likely push some producers into bankruptcy.
Financial Stress Builds
Financial stresses are building with financial markets starting the year with increased volatility and a definitive move to the downside. The ripples are being felt globally. The S&P 500 closed the week down 6%. Surprisingly, high yield debt (HYG) and emerging market debt (EMB) indices improved slightly again on a weekly average basis, but that will not hold up if markets remain under pressure.
Inventories Rise to an Eight-Year High
U.S. ethanol-blended gasoline manufacture plummeted to a two-year low. Due to the large decrease in demand and high output, ethanol inventories increased for the eighth time in 10 weeks, rising to an eight-month high.
Major Reports Ahead
As harvest was ending two to three months ago, prompt corn was trading around $3.75, soybeans were holding on around $9.00, and wheat was a $5.00+ commodity. The corn and soybean markets seemed to be taking the annual harvest pressure in stride at the time, with many looking forward to the possibility of a year-end rally as seen in 2014, or at least some stability going into the new calendar year as seen in 2013. Neither of those occurred, but there may be some light at the end of the tunnel.
Japanese Crude Runs at New Post-Turnaround High, Demands Impacted by the Holiday
Crude runs rose to a post-turnaround high, while crude stocks increased to just short of 100 MMBbls and then fell back slightly. Gasoline demand was helped by the holiday and stocks drew both weeks. Gasoil demand, after posting a gain, plunged with the New Year and stocks built. Kerosene stocks continued to draw seasonally. Refining margins remain strong, though distillate cracks continue under noticeable pressure but are offset by very strong gasoline and naphtha cracks.
Should Ukraine Be an Ongoing Concern?
Colder temperatures are finally returning to Europe after an incredibly warm 4Q 2015. Storages are being used as they should and demand numbers are starting to rise quickly. PIRA estimates residential and commercial demand figures will rise by 18% in Germany and 12% in the U.K. Looking farther east we can see that temperatures have already hit deep winter lows and storage draws have already shot up.
Healthy U.S. Job Growth Bodes Well for Outlook, but Weak ISM Is Source of Concern
The latest U.S. payroll data surpassed all expectations, and the pace of job growth accelerated significantly during the fourth quarter. Wage growth, however, remained tame. The ISM manufacturing index was disappointing, but the likelihood for now is that manufacturing’s difficulties will not spill over into other sectors. This week’s developments in China weighed on financial market confidence globally. Confusion over the country’s currency policy proved especially damaging.
Forward Brent Structure to Remain Under More Contango Pressure than Currently
While February-March Brent futures prices are under $0.40/Bbl contango, forwards like March-April and beyond are trading around $0.90/Bbl contango. This is very much related to misalignment between the futures contract and the forward BFOE market. This will change for the March and subsequent futures contracts, which will go off the board 15 days earlier than has been the case. Thus, unlike previous months, the whole March North Sea program will underlie the March futures contract, compared to just half earlier. In a contango market, having half the program go physical before expiration leaves the higher priced second half of the program to drive valuation of futures expiration, thereby directionally narrowing the contango. With the whole March program underlying futures expiration, almost double the volume previously, the contango will naturally be wider. Thus, March-April contango is already double that of February-March.
China Balancing Role in 2016: Positive, Negative or Neutral?
Long in the works, China announced a new financing source for Russian LNG supply at Yamal despite a recent stall in its actual LNG buying.
Aramco Pricing Adjustments for February — Maintaining Competitiveness
Saudi Arabia's formula prices for February were just released. The adjustments made to differentials against its key regional benchmarks were within market expectations and do not suggest a shift in Saudi export pricing policy. Pricing policy continues to be one of maintaining competitiveness, volumes, and liftings. Northwest European pricing was made more generous, Asia tightened in alignment with market circumstances and expectations, and U.S. prices left unchanged for all but the lightest grade, Saudi Extra Light. Pricing for delivery into the ports of the Mediterranean Sea was left mostly unchanged.
Mississippi River Flooding Is Not a Major Concern for Product Supply
There are fears that recent flooding along the Mississippi River will drive up gasoline prices out of concern that refineries either will shut or slow production as the flood waters head downriver. PIRA believes that those concerns are overblown. The last major flood along the Mississippi River occurred in April and May 2011. There was only one flood-related refinery outage then. The Krotz Springs refinery was idled when the Morganza Spillway was opened to relieve flood pressure on the Mississippi River.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
Oil prices have been extremely volatile since the first trading day of 2016 and hit 12-year lows last week with Brent dropping below $33 a barrel for the first time since 2005. The fall in the Chinese manufacturing index, the Saudi-Iran standoff and North Korean nuclear test have all had a significant impact on shaping oil price trends.
Brent crude rose to a three-week high of $38.91 a barrel on the 4th January as a consequence of the Saudi-Iran geopolitical risk but these gains were quickly diminished due to concerns over economic slowdown. Rising tensions in the Middle East typically trigger an increase in the price of oil, yet it seems that bearish sentiment elsewhere has prevailed over potential risk.
China’s manufacturing sector shrank for the fifth consecutive month and the Shanghai Composite stock index finished 10% down for the week; leading to uncertainty over the outlook for energy demand in China. It is a clear indication that oil demand from the world’s number two oil consumer is slowing and that the current oversupply of oil may be more persistent than expected.
Adding to uncertainty over the growth in China, news of the North Korean nuclear test came on the 6th January, which triggered Japanese and South Korean stocks in Asia to decrease overnight as investors looked to less risky assets. Whilst this has contributed to further geopolitical uncertainties, it is unlikely that it will have a sustained impact on oil prices.
Nevertheless, oil prices are likely to remain at low levels until the supply-demand balance tightens, with prospects of production declines or a pick up in the global state of the economy seeming unlikely in the short-term.
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