The last five weeks have been as volatile as any for the oil markets
in recent memory. For those with net short positions, the focus of
market chatter has remained broadly unchanged past the midway point for
the current trading year, with two tangents dominating the narrative so
far into 2015 – oil oversupply and China’s economic slowdown.
Yet, for those few with net long positions, currently left clutching
at the straws, every US stockpile decline, minor security incident or a
positive data set from a major crude importer, provides a pretext to
trigger dead cat bounces. For over a month, both Brent and WTI futures have had successive
weeks of mini spike, after spike, only for it to fizzle out as the end
of that week approached. On any given week, if a US stockpile decline
would perk up the price up on a Wednesday, some comment from a major
producer about keeping the taps open would more than wipe it out by
Friday and so it goes.
The ongoing Chinese market pandemonium has sent both benchmarks tumbling
back nearer to January’s levels. In order to get clues about the
forward direction, it is well worth looking back to get some perspective
on the state of affairs. Based on the Friday closing prices, from first
week of January to the last week of June, the Brent and WTI front month
futures contracts averaged $59.6 and $53.39 a barrel respectively,
while the OPEC basket of 12 crude oils averaged $55.16 (see below).
Half yearly average oil prices assessment based on Friday closes from January to June, 2015 © Oilholics Synonymous Report
There was a clear disparity between the first and second quarter
average prices of both benchmarks as well as the OPEC basket. Brent saw
an average price of $55.77 for the first quarter rise to $64.83, WTI saw
a rise from $49 to $57.78, and the OPEC basket posted a price uptick
from $50.74 to $59.62.
Based on what we know, it would now be too simplistic to assume a
gradual climb towards $70 by Christmas. As the oil market has been
anything but simple of late, with the first few days of third quarter
offering a case in point, falling victim to simplistic assumptions would
be perilous. The disparity in quarterly performance up to June-end is in large parts down to a very poor start to the year which saw a coming together of Brent and WTI at $48.05 on 15 January, 2015.
Such levels dragged the entire first quarter average down, making the
second quarter average look a lot flattering in relative terms.
An average uptick of $7-8 per barrel per quarter is now highly
unlikely. Furthermore, trading in July is likely to have the same
damaging effect on third quarter average price levels of both
benchmarks, as January did for the first quarter. Calmness will return,
and while the Chinese government knows a painful correction is on the
cards, powerbrokers in Beijing will not let market pandemonium in
Shanghai become a regular occurrence.
Even if we touch $70 this year for a session or two, broader market sentiment remains bearish
first and foremost down to the fact that there’s simply too much oil
out there. While non-OPEC supply correction is bound to happen, no one including the IEA
is forecasting it before the fourth quarter of this year. That will
arrive too late to have a meaningful, sustained impact to the upside on
prices this side of Christmas. US shale is weathering the downturn better than many, not least OPEC, had anticipated. That’s down to a combination of Eagle Ford plays remaining viable at price levels low as $35 in tandem with many plays in North Dakota yet to come off their price hedging plans just yet.
Oil benchmark prices at Friday close, from 2 January to 3 July, 2015 © Oilholics Synonymous Report
Meanwhile, Gulf OPEC producers with Saudi Arabia at the helm, are not relenting
in a concerted bid to retain their share of roughly 33% of the cartel’s
global oil market holding, bulk of which is based on clientele in emerging Asian markets. Iran
could well be in a position to add more oil to the global supply pool,
and even if as I suspect it would be a trickle of 200,000 barrels per
day (bpd) and not a grandiose 1 million bpd as some in the country
claim.
But even 200,000 bpd would stunt a market struggling to park somewhere between 1.1 to 1.3 million bpd of surplus oil.
Demand modelling is getting just as complicated; need for oil is not
firing up the way some want but it isn’t spiraling down either to the
extent that we will see a $40 floor breached in the case of either
futures benchmark for a sustained period of time.
For the record, I do not think China is currently growing at 7% based
on the volume of commodity cargoes heading for the country from crude
oil to copper. Hence, I agree that Chinese demand growth is not, and
will not be what it was once for a country considered the market’s primary driver as US importation volumes started declining from 2012 onwards courtesy rising domestic production.
China’s correction has already started but at the same time, Indian demand
for crude oil is rising alongside that of various emerging markets.
Even OECD demand is expected to pick up this year, albeit marginally,
and the European Union is much better equipped to handle Greece’s
economic malaise than it was five years ago.
Finally, a crucial point need not be forgotten in the midst of
current market melee – anecdotal and empirical evidence suggests many
oil producers, especially in the private sector, are holding back
sizable portions of their production capacity, yet keep taps at the
ready to sell opportunistically on the spot market. So each time the oil price rises, invariably more oil sporadically
arrives on to the spot market depending on logistics and purchase
points, according to solver models physical traders are so deftly putting into use to collect that cargo.
Paradoxically, more availability pulls the oil price down again. But
that’s the nature of the beast the industry has to contend with, and
it’s not getting tamed anytime soon as we see a once in a generation
change within the oil business. From the oil majors to OPEC, everyone is
more or less resigned to a $60 oil price over the short term. Adding up possible influences to the upside and downside, we’re stuck
in the current price range and perhaps another six, maybe nine months,
of extreme volatility with some dead cat bounces for good measure to
liven things up.
http://www.forbes.com/sites/gauravsharma/2015/07/09/state-of-the-oil-market-h1-2015-trading-patterns-convey-a-crude-reality/3/?ss=energy